Johannesburg, 15th November 2019 – GCR Ratings (‘GCR’) has reviewed the ratings of I&M Bank (Rwanda) PLC under the recently released Criteria for Rating Financial Institutions, May 2019.
I&M Bank (Rwanda) PLC’s long and short term Rwandan national scale issuer ratings have been affirmed at A-(RW)/A2(RW). The outlook has been accorded as stable.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook / Watch|
|I&M Bank (Rwanda) PLC||Issuer Long Term||National||A-(RW)||Stable Outlook|
|Issuer Short Term||National||A2(RW)||n.a|
On May 22, 2019 GCR announced that it had released new criteria for all banks and bank-like entities. This methodology is titled Criteria for Rating Financial Institutions. As a result, the ratings were placed “Under Criteria Observation”.
Subsequently, GCR has finalised the review under the new methodology. As a result, the ratings have been removed from ‘Under Criteria Observation’ and the rating revised in line with the new methodology.
The ratings factor in the following core elements of Rwandan Country and Financial Institutions Sector risk into the assessment.
Rwandan Country Risk Score: ‘4.25’
The Rwandan Country Risk Score of ‘4.25’ balances the low wealth levels with strong economic growth and above average institutional scores, underpinned by perceptions of better control of corruption than regional peers. We expect economic growth to remain around 8% in 2019, somewhat supported by expansion led government fiscal policies but also strong private sector investment.
Rwanda, Financial Institutions Sector Risk Score: 4
The Rwandan financial institutions sector risk score of ‘4’ balances the low wealth, the moderate size and diversification of the economy with modest levels of non-performing and foreign currency loans versus regional peers and regulation which is deemed to appropriate from its current levels of development and complexity. We consider the sector to be somewhat overbanked given the size of the economy, we note that the top tier of the sector is controlled by a few players but that regional banks are increasingly competitive in the country. Positively the banking sector appears well capitalised on average, but profitability can be modest. Funding is largely deposit based, with limited wholesale and external funding. The local capital markets are underdeveloped.
The ratings on I&M Bank (Rwanda) PLC balance its moderately strong market position in Rwanda, modest levels of capitalisation, strong 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 in operating in a somewhat overbanked and increasingly competitive sector. At HY19, I&M (Rwanda) maintained a 12% deposit and 9% 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 42%, 24% and 34% of revenues at FY18. 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 FY19 revenues to be flat on the previous year’s, due to some internal restructuring, depreciation and building costs and a regulatory change on clearing and prepayments.
The capitalization of the bank is a negative ratings factor. We anticipate that the bank’s GCR total capital to risk-weighted assets ratio will range around 13% over the next 12months, balancing an internal capital generation of around 20%, risk-weighted asset growth of around 15%-17.5% and a moderated dividend pay-out of 40%. The bank is considering a secondary offering, which may materially improve the capital adequacy and single obligor capacity of the bank. However, we have not factored this into the ratings until we see more progress made in the exercise and we are comfortable that capital adequacy will be managed at higher levels going forward.
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 nonperforming loans at FY18. Positively, foreign currency (‘FX’) lending is relatively modest in comparison to regional peers, with USD lending accounting for around 16% of total loans at FY18. The bank also runs a modest short net-open position of 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 FY18, deposits accounted for 92% of total deposits. The bank does run with some depositor concentrations, with the top 10, 20 and 50 depositors accounting for 31%, 39% and 52% of total deposits, respectively at HY19. 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 6x wholesale funding and 32% of customer deposits at FY18. We also view the liquidity management of the dollar book to be sound, with FX liquid assets covering around 50% 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.
The outlook on the bank is stable, balancing an expectation that the bank will slowly build capital, keep strong asset quality and sound funding/ liquidity.
We could raise the ratings if the bank raises and maintain capital adequacy at higher levels (in excess of 15%) over the outlook horizon). We could lower the ratings if asset quality deteriorates, funding proves to be less stable than expected, or if capital continues to deteriorate. We could also bring down the ratings on the bank if group exposures increase.
|Primary analyst||Nyasha Chikwengo||Financial Institutions Analyst|
|Johannesburg, ZA||NyashaC@GCRratings.com||+27 11 784 1771|
|Committee chair||Matthew Pirnie||Sector Head: Financial Institutions|
|Johannesburg, ZA||MatthewP@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, June 2019|
|GCR Financial Institutions Sector Risk Score, October 2019|
|I&M Bank (Rwanda) PLC report, December 2018|
|Rating class||Review||Rating scale||Rating class||Outlook||Date|
|Issuer Long Term||Initial/Last||National||A-(RW)||Stable||January 2019|
|Issuer Short Term||Initial/Last||National||A2(RW)||n.a||January 2019|
Risk Score Summary
|Country risk score||4.25|
|Sector risk score||4.00|
|Management and governance||0.00|
|Capital and Leverage||-2.00|
|Funding structure and Liquidity||0.50|
|National scale rating||A-/A2|
|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 process was 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; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The credit ratings have been disclosed to I&M Bank (Rwanda) PLC. 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.
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 2018;
- Unaudited financial results as at 30 June 2019;
- Banking sector information;
- A breakdown of facilities available and related counterparties;
- Industry comparative data.