Announcements Financial Institutions Rating Alerts

GCR affirms the A-(RW)/A2(RW) ratings of I&M Bank (Rwanda) PLC, Outlook Evolving, as expected capital injection offsets operating environment pressure

Rating Action

Johannesburg, 07 August 2020 – GCR Ratings (‘GCR’) has affirmed I&M Bank (Rwanda) PLC’s national scale long and short-term issuer ratings at A-(RW)/A2(RW). The outlook is evolving.

Rated Entity / Issue

Rating class

Rating scale

Rating

Outlook / Watch

I&M Bank (Rwanda) PLC

Long Term issuer

National

A-(RW)

Evolving Outlook

Short Term issuer

National

A2(RW)

Rating Rationale

The ratings on I&M Bank (Rwanda) PLC balance its moderately strong market position in Rwanda, modest levels of capitalisation, strong but pressurised risk position and sound funding structure with good liquidity.

I&M (Rwanda)’s competitive position is supported by its sound market position, as a top tier bank that operates in a somewhat overbanked and increasingly competitive sector. At Q120, I&M (Rwanda) had approximately a 11% deposit and 12% loan market share in Rwanda, with particular market strengths in the corporate and high net wealth individual’s space in the country. Business diversification is considered to fairly strong, given the small size and wealth levels of the economy, with corporate, SME and retail divisions accounting for 35%, 30% and 35% of profit before tax at FY19. The bank is, on the other hand, geographically concentrated and does not appear to benefit from the same group synergies as top tier Kenyan peers. The bank has achieved good revenue growth over the past 4-5years. However, we are expecting FY20 revenues to be just down on the previous year’s, due to pressures emanating from the operating environment. Whilst revenue stability has been good, it is somewhat supported by market sensitive income (c. 12% of total revenues).

The capitalization of the bank is a negative ratings factor. The bank’s GCR total capital to risk-weighted assets ratio was 13.7% at 1Q20 and was approaching the core equity regulatory minimums. Positively, we expect the bank to raise equity of approximately USD8mln in the next 3months, which will improve the capital ratio by approximately 200bps. However, over the next two years, we anticipate that the GCR Capital Ratio will erode to just below 15% as internal capital generation, moderated by higher provisioning needs, fails to keep in-step with risk-weighted asset growth. We expect core earnings to reduce from above 1,52% of adjusted assets to around 0,5% over the next 12-18months, reflecting lower growth and higher cost of risk.

The risk position of the bank is a positive ratings factor, reflecting the low credit losses achieved by the bank over 5 years (including forecast 19/20) of around 0.5%. We also consider loan loss reserve coverage to be appropriate, covering 2.7% of the total loan book and 85% of non-performing loans at FY18. We expect both to deteriorate in 2020/1 due to the pressure from the operating environment, with cost of risk forecasted to approach 2% in a severe stress scenario. Positively, the bank isn’t as exposed to many domestic banking peers to vulnerable sectors. As a result, we expect the bank to continue to outperform the East African banking peer group, in terms of asset quality. Furthermore, foreign currency (‘FX’) lending is relatively modest in comparison to regional peers, with USD lending accounting for around 18% of total loans at FY19. The bank also runs a modest short net-open position of less than 10% of shareholder funds, which could translate into modest balance sheet gains / losses in a USD depreciation/ appreciation event.

Funding and liquidity is considered to be a positive ratings factor for the bank. The funding structure is sound, predominantly made up of behaviourally sticky deposits. At FY19, deposits accounted for 92% of total funds. There has been an increase in less stable bank deposits over the last couple of years, with non-core deposits increasing to 20% of the funding base. As a result, the stable funding ratio is moderate versus some top-rated regional peers. Furthermore, the bank does run with some depositor concentrations, with the top 10, 20 and 50 depositors accounting for c. 25%, c. 33% and c. 47% of total deposits respectively. However, it is worth noting that the largest depositor is common across all top tier banking peers. Liquidity is positive, with liquid assets covering up to 4x wholesale funding and 35% of customer deposits at FY18. We also view the liquidity management of the dollar book to be sound, with FX liquid assets covering around 40% of total FX liabilities.

I&M Rwanda is ultimately controlled by the I&M Holdings (unrated), a financial institution holding company, which has banking subsidiaries across the East African region. However, I&M Rwanda is not owned by another regulated bank, nor does the group operate as one holistic operating structure as the group’s entities are largely operationally self-sufficient, and there is no cross-default clauses or large direct credit linkages, including no related lending or deposits. Furthermore, there is limited customer overlap between the Rwandan and sister entities. We also believe that the regulator has attempted where possible to ensure a disconnect between associate banks operating in the region. Importantly, due to I&M (Rwanda)’s status as a systemically important bank, we believe there is an economic basis for the regulator to separate the bank from the group in case of need. As a result, we have somewhat insulated the Rwandan bank (a DSIB) from its group operations, although a severe deterioration in the group’s creditworthiness may impact the ratings on the Rwandan bank.

Outlook Statement

The evolving outlook reflects the severe volatility in the economy against the expect capital increase and outperformance of the bank’s asset quality versus regional peers. In our base case we have included the capital increase of USD8mln in the next three months, but also a significant increase in the cost of risk (from 0,5% to closer to a stressed 2% in 2020) which could bring core earnings down to 0,5% of adjusted assets. We also believe funding and liquidity will remain stable. However, we believe that the extent of the shock could be greater/ lesser than our expectations depending on the re-opening of the Rwandan economy, especially tourism related industries

Rating Triggers

We could raise the ratings if the bank raises its capitalisation and asset quality outperforms our expectations, which will improve internal capital generation (post dividends) beyond our stressed forecasts. Over the longer-term more stable funding sources and greater scale could improve the rating. We could lower the ratings if the capital increase doesn’t materialise or if asset quality is worse than our forecast. Although unexpected, greater reliance on unstable funding sources or weaker liquidity could also lower the rating. A material deterioration in group dynamics could also lower the rating.

Analytical Contacts

Primary analyst

Matthew Pirnie

Group Head of Ratings

Johannesburg, ZA

MatthewP@GCRratings.com

+27 11 784 1771

     

Committee chair

Corné Els

Senior Structured Finance & Securitisation Analyst

Johannesburg, ZA

CorneE@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 Scale, Symbols & Definitions, May 2019

GCR Country Risk Scores, May 2020

GCR Financial Institutions Sector Risk Score, July 2020

 

Ratings History

I&M Bank (Rwanda) PLC

Rating class

Review

Rating scale

Rating class

Outlook

Date

Long Term issuer

Initial

National

A-(RW)

Stable

November 2018

Short Term issuer

Initial

National

A2(RW)

n.a

November 2018

Long Term issuer

Last

National

A-(RW)

Stable

November 2019

Short Term issuer

Last

National

A2(RW)

n.a

November 2019

Risk Score Summary

Rating Components and Factors

Risk Scores

   

Operating environment

7.75

Country risk score

3.75

Sector risk score

4.00

   

Business profile

0.50

Competitive position

0.50

Management and governance

0.00

   

Financial profile

(0.50)

Capital and leverage

(2.00)

Risk

1.00

Funding structure and liquidity

0.50

   

Comparative profile

0.00

Group support

0.00

Peer analysis

0.00

   

Total Score

7.75

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.

Cash Flow

The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.

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.

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.

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. 

Salient Points 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.

The credit rating has been disclosed to I&M Bank (Rwanda) PLC. The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating.

I&M Bank (Rwanda) PLC participated in the rating process via face-to-face 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 I&M Bank (Rwanda) PLC and other reliable third parties to accord the credit rating included:

  • Audited financial results as at 31 December 2019;
  • Unaudited financial results as at 31 March 2020;
  • Banking sector information;
  • A breakdown of facilities available and related counterparties;
  • Industry comparative data.
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