Johannesburg, 31 May 2017 — Global Credit Ratings (“GCR”) has affirmed Stima Sacco Society Limited’s long-term and short-term national scale ratings of BB+(KE) and B(KE) respectively; with the outlook accorded as Stable. The ratings are valid until May 2018.
SUMMARY RATINGS RATIONALE
The ratings of Stima Sacco Society Limited (“Stima”,“the society”) reflect its consistent diversified membership growth, and established franchise supported by operations which commenced in 1974. The society’s position as the second largest deposit taking savings and credit cooperative society (“Sacco”) in Kenya, with a market share of c.6% relative to total assets of the 164 registered deposit taking Saccos, is a further consideration.
In a bid to enhance its risk management structure in line with best practices, the society established a risk management and compliance department in November 2016 as part of its Risk Management Transformation Program which accompanied an enterprise wide risk management framework and a reorganisation of the company structure with the help of highly reputable external consultants.
The society’s core capital, institutional capital, and total capital and reserves increased by 18.6%, 23.5% and 15.6% at FY16 to KES2.9bn, KES2.1bn, and KES3.1bn respectively. Consequently, Stima was in compliance with all the capital requirements of the Sacco Act. The society reported a lower core capital to total assets ratio of 11.9% at FY16 (FY15: 12.1%), against a regulatory minimum of 10%, mainly as a result of strong (20.8%) growth in total assets. From a gearing perspective, external borrowings at 2.6% of total assets at FY16 (FY15: 2.1%) were well within the statutory cap of 25%.
The society maintained an acceptable asset quality profile, reporting a lower gross non-performing loan (“NPL”) ratio of 1.7% at FY16 (FY15: 2%), below the prudential benchmark of 5% despite a challenging operating environment. Specific provisions increased by 2.2x as management took a prudent and conservative approach, partly in anticipation of the impact of IFRS 9 implementation. Consequently, specific provisions covered 36.7% (FY15: 18.9%) of gross NPLs at FY16. Specific provisions are raised in line with prudential guidelines.
Net profit before tax grew by 89.5% to a five year high of KES547.4m in FY16, supported by an increase in net interest income (due to high loan growth), despite increases in impairment charges and operating expenditure. The net interest margin increased to 7.2% at FY16 (FY15: 5.1%) and the cost ratio decreased to 64.6% at FY16 (FY15: 73.1%).The society’s ROaA and ROaE increased to 2.2% and 17.1% in FY16 (FY15: 1.4% and 10.1%) respectively.
Member deposits, the society’s main source (89.9%) of funding, grew by 19.7% in FY16 to KES19.0bn supported by a 57.8% increase in members. Stima has consistently maintained its liquidity ratio above the prudential requirement of 15%, registering 23% at FY16.
The society’s ratings could be positively impacted by significant improvements in capitalisation, positive earnings trend, improved risk management oversight, sound credit protection factors, the success of the society’s ambitious growth strategy, business reorganisation and capital/fund raising initiatives. Stima’s ratings could be negatively impacted by downward pressure on earnings and capital adequacy, increasing liquidity risk and asset quality problems, as well as a breach of prudential benchmarks (capital, asset quality, liquidity etc).
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (December 2013)||Last rating (May 2016)|
|Long-term: BB+(KE); Short-term: B(KE)||Long-term: BB+(KE); Short-term: B(KE)|
|Outlook: Stable||Outlook: Stable|
|Senior Credit Analyst|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2017
Criteria for Rating Finance and Leasing Companies, updated March 2017
Stima rating reports (2013-16)
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 ratings have been disclosed to Stima Sacco Society Limited with no contestation of the rating.
- Audited financial results of the society as at 31 December 2016 (plus four years of comparative figures)
- Unaudited interim results of the society as at 28 February 2017
- Budgeted financial statements for 2017
- Latest internal and/or external audit 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, 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 GLOSSARY
|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.|
|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.|
|Cost Ratio||The ratio of operating expenses to operating income. Used to measures a bank’s efficiency.|
|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.|
|Creditworthiness||An assessment of a debtor’s ability to meet debt 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.|
|Default||Failure to meet the payment obligation of either interest or principal on a debt or bond. Technically, a borrower does not default, the initiative comes from the lender who declares that the borrower is in default.|
|Financial Institution||An entity that focuses on dealing with financial transactions, such as investments, loans and deposits.|
|Gearing||With regard to corporate analysis, gearing (or leverage) refers to the extent to which a company is funded by debt.|
|Guarantee||An undertaking in writing by one person (the guarantor) given to another, usually a bank (the creditor) to be answerable for the debt of a third person (the debtor) to the creditor, upon default of the debtor.|
|Impairment||Reduction in the value of an asset because the asset is no longer expected to generate the same benefits, as determined by the company through periodic assessments.|
|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.|
|Leverage||With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.|
|Liquid Assets||Assets, generally of a short term, that can be converted into cash.|
|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.|
|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.|
|Principal||The total amount borrowed or lent, e.g. the face value of a bond, excluding interest.|
|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.|
|Risk Management Process||The systematic application of management policies, procedures and practices to the tasks of risk identification, assessment and measurement, response and action, monitoring and review, and risk reporting.|
|Securities||Various instruments used in the capital market to raise funds.|
|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 glossary of terms please click here
GCR affirms Stima Sacco Society Limited’s rating of BB+(KE); Outlook Stable.