Johannesburg, 27 May 2016 — Global Credit Ratings has 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 May 2017.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Stima Sacco Society Limited (“Stima”,“the society”) based on the following key criteria:
The ratings of Stima reflect its growing local franchise, built on 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% relative to total assets of the 164 registered deposit taking Saccos. Efforts are ongoing to enhance governance and risk management structures. The Board of Directors approved a three year enterprise wide risk management (“ERM”) strategy (ending 2016), which encompasses the establishment of a separate ERM function and a reorganisation of the company structure with the help of highly reputable external consultants.
Although the society is not constrained by the same capital reserving rules applied to banks, the overall capital base appears adequate for the level of risk assumed. Core capital grew by 6.2% to KES2.5bn at FYE15, supported by growth in membership and retained income. The society reported a core capital to total assets ratio of 12.1% at FYE15 (FYE14: 14.1%), against a regulatory minimum of 10%. From a gearing perspective, external borrowings at 2.1% of total assets at FYE15 (FYE14: 2.5%) were well within the statutory cap of 25%.
Whilst credit protection ratios weakened in F15, on the back of a challenging economic climate, the overall asset quality position remained acceptable. Gross non-performing loans (“NPLs”) grew by 83.4% to KES358.4m at FYE15 (FYE14: 79.5%). Consequently, the gross NPL ratio increased to 2.2% of gross loans at FYE15 (FYE14: 1.4%), which was above the society’s internal limit of 1.5%, although below the prudential benchmark of 5%. Management has largely attributed the growth in arrears to SMEs (constituting c.9% of the total loan portfolio) and members outside the society’s traditional target market. Enhanced origination standards and the establishment of a recoveries unit should see a marked improvement in the collection of arrears and the underwriting of better quality assets going forward. Specific provisions are raised in line with prudential guidelines, and covered 27.6% of NPLs at FYE15 (FYE14: 37.0%)
Profitability came under pressure in F15, with the society reporting a 24.4% decline in pre-tax profit to KES288.8m (F14: 44% increase). Earnings performance was impacted by a lower net interest margin, lower loan growth and higher operating costs. The cost ratio climbed to 73.1% in F15 from 58.4% in F14, mainly due to expansion costs. The ROaA and ROaE declined to 1.4% (F14: 2.6%) and 10.1% (F14: 17.5%) in F15, respectively. The liquidity ratio was maintained above the statutory minimum of 15% throughout F15 and 1Q F16.
Maintaining adequate capitalisation, improved risk management oversight, sound credit protection factors and a positive earnings trend, will be considered positively. Furthermore, the success of the society’s ambitious growth strategy, business reorganisation and capital/fund raising initiatives, could have a positive rating impact. However, further downward pressure on earnings and capital adequacy, increasing liquidity risk and asset quality problems (on the back of an uncertain macroeconomic environment), as well as a breach of prudential benchmarks (capital, asset quality, liquidity etc), could see ratings come under pressure.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (December 2013)|
|Long-term: BB+(KE); Short-term: B(KE)|
|Last rating (May 2015)|
|Long-term: BB+(KE); Short-term: B(KE)|
|Primary Analyst||Committee Chairperson|
|Jennifer Mwerenga||Omega Collocott|
|Senior Credit Analyst||Sector Head: Financial Institution Ratings|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other updated March Financial Institutions, updated March 2016
Criteria for Rating Finance and Leasing Companies, updated March 2016
Kenya Operating Overview, May 2016
Stima rating reports (2013-15)
RATING LIMITATIONS AND DISCLAIMERS
ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.NET/RATINGS-INFO. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.NET.
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 2015 (plus four years of comparative figures)
Unaudited interim results of the society as at 31 March 2016
Budgeted financial statements for 2016
Latest internal and/or external audit report to management
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, Stima Sacco Society Limited, 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 SECTOR GLOSSARY
|Arrears||An overdue debt, liability or obligation. An account is said to be ‘in arrears’ if one or more payments have been missed in transactions where regular payments are contractually required.|
|Asset||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|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 (ie, being paid back in accordance with their terms) and the likelihood that they will continue to perform.|
|Audit Report||A written opinion of an auditor (attesting to the financial statements’ fairness and compliance with generally accepted accounting principles).|
|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|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.|
|Capital Base||The issued capital of a company, plus reserves and retained profits.|
|Corporate Governance||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.|
|Cost Ratio||The ratio of operating expenses to operating income. Used to measures a bank’s efficiency.|
|Credit Rating Agency||An entity that provides credit rating services.|
|Financial Institution||An entity that focuses on dealing with financial transactions, such as investments, loans and deposits.|
|Financial Statements||Presentation of financial data including balance sheets, income statements and statements of cash flow, or any supporting statement that is intended to communicate an entity’s financial position at a point in time.|
|Gearing||With regard to corporate analysis, gearing (or leverage) refers to the extent to which a company is funded by debt.|
|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.|
|International Scale Rating LC||International local currency (International LC) ratings measure the likelihood of repayment in the currency of the jurisdiction in which the issuer is domiciled. Therefore, the rating does not take into account the possibility that it will not be able to convert local currency into foreign currency or make transfers between sovereign jurisdictions.|
|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.|
|Long-Term Rating||Reflects an issuer’s ability to meet its financial obligations over the following three to five year period, including interest payments and debt redemptions. This encompasses an evaluation of the organisation’s current financial position, as well as how the position may change in the future with regard to meeting longer term financial obligations.|
|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.|
|National Scale Rating||Provides a relative measure of creditworthiness for rated entities only within the country concerned. Under this rating scale, a ‘AAA’ long term national scale rating will typically be assigned to the lowest relative risk within that country, which in most cases will be the sovereign state.|
|Net Interest Margin||Net interest income divided by average interest earning assets. Measures a bank’s margin after paying funding sources and how successful a bank’s interest-related operations are.|
|Performing Loan||A loan is said to be performing if the borrower is paying the interest on it on a timely basis.|
|Portfolio||A collection of investments held by an individual investor or financial institution. They may include stocks, bonds, futures contracts, options, real estate investments or any item that the holder believes will retain its value.|
|Provision||The amount set aside or deducted from operating income to cover expected or identified loan losses.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|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.|
|Short-Term||Current; ordinarily less than one year.|
|Short-Term Rating||An opinion of an issuer’s ability to meet all financial obligations over the upcoming 12 month period, including interest payments and debt redemptions.|
For a detailed glossary of terms utilised in this announcement please click here
GCR affirms Stima Sacco Society Limited’s rating of BB+(KE); Outlook Stable.