Announcements Financial Institutions Rating Alerts

GCR affirms Stima DT Sacco Society Limited’s issuer national scale rating of BB(KE), Outlook Negative

Rating Action

Johannesburg, 03 December 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 revised to Negative.

Rated Entity

Rating class

Rating scale

Rating

Outlook/Watch

Stima DT Sacco Society Limited

Long Term Issuer

National

BB(KE)

Negative Outlook

Short Term Issuer

National

B(KE)

Rating Rationale

The ratings on Stima Sacco Society Limited (“Stima Sacco”, “the Sacco”) reflect a limited competitive position, intermediate capitalisation, good risk position, stable funding structure and appropriate liquidity.

The Sacco’s competitive position is a negative ratings factor. Stima Sacco is a deposit-taking co-operative society with a common bond that allows membership to individuals, institutions and groups in the energy and allied sector; public sector employees; private sector employees; energy consumers; business community; body corporate registered in the area of operation; and Kenyans living in the diaspora.

The Sacco’s historical sector of focus is the energy sector, however the Sacco’s membership base has since become relatively more diverse, with the energy sector being c.30% of the membership base. This results in Stima Sacco’s business line diversification being marginally better than some peers. The Sacco is a non-bank financial institution largely providing secondary financial services exclusively in Kenya, as a result, its geographic diversification and market share are inherently weaker than broader rated financial sector peers. Positively, as at FY19, Stima Sacco was the second biggest deposit-taking Sacco in Kenya, with a 7.4% deposit market share. Therefore, we consider its business stability and competitive position versus deposit-taking Sacco’s in Kenya to be good. Furthermore, we believe that the role and status of the entity has inherently garnered strong customer loyalty and helps maintain good revenue stability which is expected to continue over the ratings horizon. Nevertheless, the entity is relatively small and undiversified in comparison to larger top tier financial service providers. We estimate that Stima Sacco would have around 0,7% of total financial service deposits (banks and deposit taking non-banks).

Looking back over the past few years, the Sacco has had a history of minor management and governance transgressions, which we view negatively. Positively, we expect more stability in the new management team while transparency of the entity is considered to be adequate. We could revise this position as a better track-record is established.

The Sacco’s capital position is intermediate and a positive ratings factor, with a GCR Leverage ratio of 13.8% for FY19 (FY18: 12.5%). Stima Sacco’s capital position is structured around member capital contributions and supported by strong earnings (with Return on Assets in the 2% – 3% range over the past three years), albeit countered by a slightly aggressive dividend policy, with a pay-out ratio of c.25% for FY19 (peers average between 20% – 50%, with an outlier close to 14%). GCR expects the capital position to improve with GCR Leverage forecast to increase to between 15% – 17% over the next 2 – 3 years as a result of the ongoing capital call on members (increase in minimum share capital per member).

Stima Sacco’s risk position is a positive ratings factor. The Sacco’s risk position is broadly in line with deposit-taking Sacco peers, but better than the wider financial institutions sector. The positive risk position is supported in part by the Sacco model, which includes salary deductions, collateral and suretyship within its underwriting process, no foreign currency lending and small lending concentrations. Credit losses and gross non-performing loans (“gross NPLs”) were 3.2% and 9.8%, respectively for FY19, representing a material increase from 0.6% and 5.5%, respectively in FY18. The increase in credit losses was largely as a result of further implementation of IFRS 9 and as such, we expect stabilisation in the metric, albeit at levels higher than historically achieved (below 1%). Gross NPL increases were caused by historically weak underwriting and control lapses are also expected to moderate over the next 2 – 3 years from largely recoveries and some level of write offs.

The Sacco’s funding and liquidity is a slight positive ratings factor. Similar to other deposit-taking Sacco peers, the funding structure is very stable, with ‘non-withdrawable’ deposits (member deposits than can only be withdrawn with notice, if loans are fully paid down and the customer is leaving the Sacco) accounting for c.77% of total customer deposits at FY19. Further, the deposit book is also very diversified, with the top 20 depositors accounting for less than 1% of total deposits. Negatively, with a cost of funding of over c.9%, the Sacco’s funding is materially more expensive than that of tier 1 and 2 banks which approximately range between 5% and 7%. Liquidity is adequate, with GCR Liquid Assets covering c.78% of withdrawable customer deposits and 21% of total deposits at FY19.

Outlook Statement

The outlook is negative. This reflects the deterioration in the operating environment as a result of the economic impact of COVID-19, as well concerns of the Sacco failing to stabilise its risk position closer to historical levels as expected. This is balanced by our expectation of the Sacco’s capital position remaining intermediate, supported by a GCR leverage ratio above 15%, driven by good earnings and increases in the member share capital. The liquidity position is expected to remain adequate for the structure of funding.

 

Rating Triggers

A downgrade could arise from further deterioration or failure to improve asset quality closer to historical levels. Further, a material deterioration in the capital position could also result in a downgrade. We consider there to be limited upward ratings potential over the ratings horizon.

Analytical Contacts

Primary analyst

Thandolwenkosi Mkwanazi

Financial Institutions Analyst

Johannesburg, ZA

ThandolwenkosiM@GCRratings.com

+27 11 784 1771

     

Committee chair

Vinay Nagar

Senior Financial Institutions Analyst

Johannesburg, ZA

Vinay@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, November 2020

GCR Financial Institutions Sector Risk Score, August 2020

Ratings History

Stima DT Sacco Society Limited

Rating class

Review

Rating scale

Rating

Outlook/Watch

Date

Long Term issuer

Initial

National

BB+(KE)

Stable Outlook

December 2013

Last

National

BB(KE)

Stable Outlook

September 2019

Short Term issuer

Initial

National

B(KE)

n.a

December 2013

 

Last

National

B(KE)

n.a

September 2019

Risk Score Summary

Rating Components & Factors

Risk Scores

 

 

Operating environment

5.50

Country risk score

4.00

Sector risk score

1.50

   

Business profile

(3.50)

Competitive position

(3.00)

Management and governance

(0.50)

   

Financial profile

3.50

Capital and Leverage

1.50

Risk

1.50

Funding and Liquidity

0.50

   

Comparative profile

0.00

Group support

0.00

Government support

0.00

Peer analysis

0.00

   

Total Score

5.50

Glossary

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 ratings have 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 ratings.

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 ratings included:

  • Audited financial results of Stima DT Sacco Society Limited as at 31 December 2019;
  • Unaudited financial results of Stima DT Sacco Society Limited as at 30 September 2020;
  • January – September 2020 Financial Outlook.
  • Industry comparative data.

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