Nairobi, 27 May 2020 – GCR Ratings (“GCR”) has affirmed the Kenyan long and short-term issuer ratings of Stima DT SACCO Society Limited of BB(KE) and B(KE) respectively, with the outlook changed to Stable from Negative.
|Rated Entity||Rating class||Rating scale||Rating|
|Stima DT SACCO Society Limited||Long Term Issuer||National||BB(KE)||Stable Outlook|
|Short Term Issuer||National||B(KE)|
The ratings on Stima SACCO Society Limited (“Stima SACCO”, “the SACCO”) reflect its stable funding structure, intermediate capitalisation, adequate liquidity, and improved governance, counterbalanced by a sustained moderate risk position and a limited competitive position in the context of the broader banking/financial institutions sector.
The Kenyan Banking sector comprises of Commercial Banks, SACCOs and Micro Finance Institutions (MFIs). In terms of asset values, commercial banks have assets of over KES 5trillion, SACCOs over KES 600billion and MFIs approximately KES 75billion. The SACCO sector is dominated by a few large SACCOs; out of 175 SACCOs, the largest 20 control about 60% of the deposits. Even though Stima SACCO is the second largest deposit-taking co-operative society with over 140,000 members and assets of KES 41billion, the competitive score is a negative factor due to the sheer size of the commercial banking sector.
The GCR Leverage ratio at 15.21% in FY20 places it at the top end of intermediate range of our criteria partly because of the continued higher dividend pay-outs compared to peers which have restrained the capital ratios. The current institutional assets to capital ratio and the core capital to total assets ratio offer buffers of 2.2% and 5.3% above the regulatory requirements. Positively, the core capital to deposits ratio of 19.3% is however 11.3% above the regulatory requirement of 8.0%.
Management has informed us of the SACCO’s plans to increase the capital position through raising KES1bn of additional capital in the medium-term. One of the ways it plans to do this is to reach out to about 80,000 members who have not fully paid up their share capital of KES 25,000.
On the positive side, we have increased the management and governance score. After a few years of turbulent management changes, the SACCO seems to have stabilised, and in our view, transparency has also improved.
Stima SACCO’s risk position has been lowered to reflect the sustained increase in the NPL ratio to 10.6% as at the end of FY20 (FY19: 9.8%). The NPL exposure is mostly from corporates which, despite only accounting for 0.69% of the loan book, constitute 57% of the top 20 NPLs in terms of value. Management has acknowledged the legacy issues inherent in the loan book and is slowing down lending to this segment. Although the commercial banking sector closed FY20 with NPLs hovering at around 14.0%, Stima SACCO NPLs compare unfavourably to peers in the SACCO sector.
Stima SACCO’s funding and liquidity is a positive ratings factor. Stima SACCO has access to stable funding in the form of non-withdrawable deposits which form c.77% of total customer deposits (KES23.7bn). The SACCO is creating an over-the-counter market to enable members trade in Stima SACCO’s shares as these deposits cannot be withdrawn even when a member leaves the SACCO. The deposit book is diversified, with the top 20 depositors accounting for c.6.15% of total deposits.
Negatively, SACCOs have a higher cost of funding because of their nature and Stima SACCO with a cost of funding of 9.7% in FY20 (FY19: 10.1%), has funds that are materially more expensive than those of commercial banks whose cost of funds average c.2.0%. We, however, consider the liquidity more than adequate, with the regulatory liquidity ratio at 65.93% at the end of FY20 (FY19: 89.8%) which is above the regulatory requirement of 15%.
The outlook is stable. However, the high NPL ratio is our biggest concern. GCR’s Leverage ratio is at the top end of intermediate range. The liquidity position is expected to remain adequate for the outlook period.
A downgrade could arise from the further deterioration in the NPL ratios, weaker earnings, increased dividend pay-outs and a worsening of the GCR Capital Ratio to below 15%. An upgrade could result from a material decline in the NPL Ratio, stronger earnings, and an injection of the KES 1billion in capital.
|Primary analyst||Eleanor Kigen||Senior Analyst|
|Nairobi, KE||eleanork@GCRratings.com||+254 732 188 671|
|Secondary analyst||Vinay Nagar||Senior Financial Institutions Analyst|
|Johannesburg, ZA||vinay@GCRratings.com||+27 11 784 1771|
|Committee chair||Matthew Pirnie||Group Head of Ratings|
|Johannesburg, ZA||matthewp@GCRratings.com||+27 11 784 1771|
Related Criteria and Research
|Criteria for the GCR Ratings Framework, May 2019|
|Criteria for Rating Financial Institutions, May 2019|
|GCR Ratings Scales, Symbols & Definitions, May 2019|
|GCR Country Risk Scores, March 2021|
|GCR Financial Institutions Sector Risk Score, February 2021|
Stima DT SACCO Society Limited
Risk Score Summary
|Rating Components & Factors||Risk Scores|
|Country risk score||4.00|
|Sector risk score||2.50|
|Management and governance||0.00|
|Capital and Leverage||1.50|
|Funding and Liquidity||0.50|
|Capital||The sum of money that is invested to generate proceeds.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Debt||An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.|
|Diversification||Spreading risk by constructing a portfolio that contains different exposures whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.|
|Exposure||Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For a company, its exposure may relate to a particular product class or customer grouping. Exposure may also arise from an overreliance on one source of funding. In insurance, it refers to an individual or company’s vulnerability to various risks|
|Income||Money received, especially on a regular basis, for work or through investments.|
|Interest||Scheduled payments made to a creditor in return for the use of borrowed money. The size of the payments will be determined by the interest rate, the amount borrowed or principal and the duration of the loan.|
|Issuer||The party indebted or the person making repayments for its borrowings.|
|Leverage||With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.|
|Liquidity||The speed at which assets can be converted to cash. It can also refer to the ability of a company to service its debt obligations due to the presence of liquid assets such as cash and its equivalents. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price.|
|Long Term Rating||See GCR Rating Scales, Symbols and Definitions.|
|Margin||A term whose meaning depends on the context. In the widest sense, it means the difference between two values.|
|Market||An assessment of the property value, with the value being compared to similar properties in the area.|
|Maturity||The length of time between the issue of a bond or other security and the date on which it becomes payable in full.|
|Rating Outlook||See GCR Rating Scales, Symbols and Definitions.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Short Term Rating||See GCR Rating Scales, Symbols and Definitions.|
|Short Term||Current; ordinarily less than one year.|
SALIENT POINTS OF ACCORDED RATING
GCR affirms that a.) no part of the ratings were influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The credit rating has been disclosed to Stima DT SACCO Society Limited. The ratings above were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating.
Stima DT SACCO Society Limited participated in the rating process via telephonic management meetings, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The information received from Stima DT SACCO Society Limited and other reliable third parties to accord the credit rating included:
- Audited financial results of Stima DT SACCO Society Limited as at 31 December 2020;
- Management letter from auditors December 2020;
- SASRA Industry Reports;
- Regulatory returns filed by Kenya Police SACCO.