Johannesburg, 25 May 2015 – Global Credit Ratings has today affirmed the national scale ratings assigned to Stima Sacco Society Limited of BB+(KE) and B(KE) in the long term and short term respectively; with the outlook accorded as Stable. The ratings are valid until 05/2016.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating(s) to Stima Sacco Society Limited (“Stima” and/or “the society”) based on the following key criteria:
The accorded ratings reflect Stima Sacco Society Limited’s (“Stima” and/or “the society”) growing local franchise, built off its member based lending targeting employees in the energy sector, which was later expanded to include allied industries, small and medium sized enterprises (“SMEs”) and other salaried employees in the wider business community. Stima is the third largest deposit-taking savings and credit cooperative society (“Sacco”) in Kenya, with a market share of c.5.0% (in terms of assets) out of the 176 registered deposit taking Saccos.
The society has a fairly skilled and experienced management team. Efforts are ongoing to enhance governance and risk management structures. Although the board of directors (“board”) is structured in line with existing regulations, the society is planning to introduce two independent directors to align its board with best practice and strengthen the skills set. The board approved a three year enterprise wide risk management (“ERM”) strategy (ending 2016), which will see the establishment of a separate ERM function and a reorganisation of the company structure with the help of highly reputable external consultants.
During F13, Stima purchased land via its subsidiary, Stima Housing Limited, for property development to kick-start the society’s venture into mortgage lending. The purchase of the land, however, led to a breach in key capitalisation ratios which require investments in subsidiaries to be deducted from capital. Consequently, the society reported a core capital/total assets ratio of 9.2% at FYE14 (FYE13: 9.1%), which was below the 10% prudential minimum. Sacco Societies Regulatory Authority (“SASRA” or “the authority”) granted the society a waiver for the breach but also directed Stima to dispose of the property if it remains unutilised for two years from the date of acquisition (i.e. by August 2015). At a board meeting held on 17 December 2015, the board approved a proposal to regularise the capital breach which entailed the reclassification of the purchased land to investment property (which is not deductible for capital adequacy purposes) and the voluntary wind up of the subsidiary. The transfer of the land and wind up of the subsidiary was finalised during 1Q F15. Accordingly, returns submitted to SASRA at 1Q F15 indicate that the society’s core capital/total assets ratio amounted to 11.8% (minimum 10%). However, the institutional capital/total assets ratio was marginally below the minimum 8.0% at 7.6%. Management advised that the breach would be regularised via retained earnings and growth in membership before 3Q F15.
Asset quality remained sound with the gross non-performing loan (“NPL”) ratio within the society’s internal limit of 1.5%, and well below the prudential benchmark of 5% at FYE14. Nevertheless, NPLs grew by 79.4% to KES195.4m at FYE14. Accordingly, the gross NPL ratio increased to 1.4% of gross loans at FYE14 (FYE13: 1.0%). The deterioration largely emanated from the SMEs book (constituting c.9.0% of the total loan portfolio). Provisions are raised in line with prudential guidelines and covered 72% of NPLs.
A pre-tax profit of KES381.9m was recorded in F14, 44.1% up from F13. An expanded loan book and growth in other income drove the performance. Overall, the ROaA and ROaE increased to 2.6% (F13: 2.3%) and 17.8% (F13: 15.6%) respectively in F14. The liquidity ratio was maintained well above the statutory floor of 15% throughout F14 and 1Q F15.
Maintaining adequate capitalisation, improved risk management oversight, sound credit protection factors and a positive earnings trend, will be considered positively. However, inability to comply with statutory capital adequacy ratios (including the institutional capital/total assets ratio) within stipulated implementation timeframes, downward pressure on the society’s earnings and capital adequacy, and increasing liquidity risk and asset quality problems on the back of an uncertain macroeconomic environment outlook, could see ratings come under pressure.
NATIONAL SCALE RATINGS HISTORY
Initial rating (Dec/2013)
Long-term: BB+(KE); Short-term: B(KE)
Last rating (Nov/2014)
Long-term: BB+(KE); Short-term: B(KE)
Rating watch: Yes
Senior Credit Analyst
Sector Head: Financial Institution Ratings
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2015
Criteria for Rating Finance and Leasing Companies, updated March 2015
Stima rating reports (2013-14)
RATING LIMITATIONS AND DISCLAIMERS
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SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
Stima Sacco Society Limited participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit rating/s has been disclosed to Stima Sacco Society Limited with no contestation of the rating.
- Audited financial results of the society as at 31 December 2014
- Unaudited interim results of the society as at 31 March 2015
- Five years of comparative numbers
- Budgeted financial statements for 2015
- Latest internal and/or external report to management
- Reserving methodologies
- A breakdown of facilities available and related counterparties
- Corporate governance and enterprise risk framework
- Industry comparative and regulatory framework
The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S FINANCIAL INSTITUTIONS GLOSSARY
|Asset||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|Asset Quality||Asset quality refers primarily to the credit quality of a bank’s earning assets, the bulk of which comprises its loan portfolio, but will also include its investment portfolio as well as off balance sheet items. Quality in this context means the degree to which the loans that the bank has extended are performing (i.e. being paid back in accordance with their terms) and the likelihood that they will continue to perform.|
|Balance Sheet||Also known as a Statement of Financial Position. A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been financed.|
|Capital||The sum of money that is invested to generate proceeds.|
|Capital Adequacy||A measure of the adequacy of an entity’s capital resources in relation to its current liabilities and also in relation to the risks associated with its assets. An appropriate level of capital adequacy ensures that the entity has sufficient capital to support its activities and that its net worth is sufficient to absorb adverse changes in the value of its assets without becoming insolvent.|
|Corporate Governance||Corporate governance broadly refers to the mechanisms, processes and relations by which corporations are controlled and directed, and is used to ensure the effectiveness, accountability and transparency of an entity to its stakeholders.|
|Credit Rating||An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.|
|Credit Rating Agency||An entity that provides credit rating services.|
|Credit Risk||The possibility that a bond issuer or any other borrowers (including debtors/creditors) will default and fail to pay the principal and/or interest when due.|
|Creditworthiness||An assessment of a debtor’s ability to meet debt obligations.|
|Franchise||Business or banking franchise; a bank’s business.|
|Income Statement||A summary of all the expenditure and income of a company over a set period.|
|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.|
|Interest Rate||The charge or the return on an asset or debt expressed as a percentage of the price or size of the asset or debt. It is usually expressed on an annual basis.|
|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.|
|Liquidity Risk||The risk that a company may not be able to meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets. Regarding securities, the risk that a financial instrument cannot be traded at its market price due to the size, structure or efficiency of the market.|
|Long term||Not current; ordinarily more than one year.|
|Margin||The rate taken by the lender over the cost of funds, which effectively represents the entity’s profit and remuneration for taking the risk of the loan; also known as spread.|
|Non-Performing Loan||When a borrower is overdue, typically 90+ days in arrears or as defined by the lender, or in the transaction documents.|
|NPL Ratio||The ratio of non-performing loans and advances to total gross loans and advances, expressed as a percentage.|
|Performing Loan||A loan is said to be performing if the borrower is paying the interest on it on a timely basis.|
|Provision||The amount set aside or deducted from operating income to cover expected or identified loan losses.|
|Retained Earnings||Earnings not paid out as dividends by a company. Retained earnings are typically reinvested back into the business and are an important component of shareholders’ equity.|
|Risk Management||Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy.|
|Security||An asset deposited or pledged as a guarantee of the fulfilment of an undertaking or the repayment of a loan, to be forfeited in case of default.|
|Shareholder||An individual, entity or financial institution that holds shares or stock in an organisation or company.|
|Short Term||Current; ordinarily less than one year.|
|Waiver||In banking terms, a waiver is the relinquishing of rights. Sometimes also considered to be the exemption or settlement of a part of debt.|