Announcements Financial Institutions Rating Alerts

GCR affirms the AA-(KE)/ A1+(KE) ratings of Equity Group Holdings Plc, Ratings Placed on Negative Outlook to reflect operating environment pressure

Rating action

Johannesburg, 23rd July 2020 – GCR Ratings (“GCR”) has affirmed the national scale long term and short term issuer ratings of AA-(KE) and A1+(KE), respectively, on Equity Group Holdings, with a Negative outlook.

Rated Entity

Rating class

Rating scale

Rating

Outlook/Watch

Equity Group Holdings

Long Term issuer

National

AA-(KE)

Negative Outlook

Short Term issuer

National

A1+(KE)

Rating rationale

The unsolicited ratings on Equity Group Holdings PLC (‘Equity Group’, ‘the Group’) reflect the group’s strong competitive position, adequate capital position supported by strong earnings, slightly better than average risk position, and solid funding with robust liquidity. The negative outlook reflects the heightened economic and sector risks, which will raise credit losses and restrain earnings across the sector and the group.

Nairobi based- Equity Group Holdings Plc is the non-operating holding company sitting atop the Equity Group, one of the largest and most diversified financial service providers in the East and Central African region. At FY19, the group operated banking franchises across six markets in Kenya (contributing 75% of group loans), Democratic Republic of Congo (<10%), Uganda, Tanzania and Rwanda (combined c.15%) and South Sudan <1%. The group also operates four non-bank entities, predominantly in Kenya, that provide around 2% of PBT at FY19.

Within its core market, of Kenya, the bank is a tier one institution with approximately a 10% deposit market share. The revenue stability of the Group has been good over the past four years, consistently growing despite the impact of the interest rate caps, in part due to the high contribution of non-interest income (approximately 40% of operating revenues at FY19) and very low cost of funds (c.2%).

With a GCR capital ratio of around 17.75% at 1Q20, we consider the capitalisation of the group to be at the lower end of the intermediate range. However, our assessment is supported by robust internal capital generation (averaging c.25% over the past three years). Therefore, despite the significant strain from the operating environment we expect return on assets to be around 2%. Our expectations balance revenue growth of around 3%-5%, a cost to income of around 50% and a slight reduction in net interest margins. Going forward, we expect NPLs to rise materially, to over 15% of total loans and cost of risk to markedly deteriorate to between 3% to 3.5% over 2020/21. At the same time, we expect asset growth to a moderate 5%.

Despite our expectations of the deterioration in asset quality, the risk position of the group is a slightly positive rating factor. The group has achieved a cost of risk below 1% for the past five years, which compares well to the market average, despite non-performing loans broadly being in line with top tier peers. However, there has been a deterioration in asset quality and cost of risk in the first quarter of 2020, and we expect the deterioration to continue. We also factor in the positive loan book diversification both geographically and by industry/ sector into the risk position assessment. Around 30% of the loan book is extended in foreign currency (“FX”), which introduces some additional risk in the current USD appreciation cycle. However, the degree of FX lending is in line with regional peers and the group operates a modest net open position on the banking book.

The funding structure of the group is stable, with core customer deposits contributing around 90% of the total liability base at FY19. Deposits are split somewhat evenly between retail and corporate. However, they are originated at a price advantage versus sector peers, which demonstrates the strength of the group’s franchise and distribution capabilities. Liquidity is considered strong, with broad liquid assets covering 4.5x wholesale funding or 50% of total customer deposits.

We have factored in some structural subordination into the ratings, reflecting the non-operating holding company status of the rated entity. Specifically, this addresses the risk that the entity is reliant on the upstreaming of dividends from regulated entities to repay its obligations.

Outlook statement

The outlook is negative, due to the pressure on the banking sector and the banking group as whole. Specifically, we are expecting increased vulnerability of local banks in Kenya and East Africa as a whole, which raised counterparty risks. Furthermore, we are factoring in the deterioration in asset quality, earnings and capitalisation of the group for the next 12 months. As a result, we are anticipating cost of risk to rise for the group but remain below the regional average. Nevertheless, this will bring down earnings and restrain internal capital generation. Positively, the group is not expected to pay dividends which will keep capitalisation around current levels.

Rating triggers

A downgrade could arise from rising sector instability, deteriorating asset quality and weakening in the capital position, as a result of weakening earnings. Further, a material deterioration in the asset quality could bring the ratings down. We don’t expect any positive movement in the national scale ratings over the outlook horizon.

Analytical contacts

Primary analyst

Matthew Pirnie

Group Head of Ratings

Johannesburg, ZA

MatthewP@GCRratings.com

+27 11 784 1771

     

Secondary analyst

Eleanor Kigen

Senior Financial Institutions Analyst

Kenya, KE

EleanorK@GCRratings.com

+254 20 3673618

     

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

Equity Group Holdings PLC

Rating class

Review

Rating scale

Rating class

Outlook

Date

Long Term issuer

Initial

National

A(KE)

Stable

July 2005

Last

National

AA-(KE)

Stable

September 2019

Short Term issuer

Initial

National

A1-(KE)

Stable

July 2005

Last

National

A1+(KE)

Stable

September 2019

Risk score summary

Rating Components & Factors

Risk scores

 

 

Operating environment

7,00

Country risk score

3,50

Sector risk score

3,50

   

Business profile

2,00

Competitive position

2,00

Management and governance

0.00

   

Financial profile

1,75

Capital and Leverage

0,00

Risk

0,50

Funding and Liquidity

1,25

   

Comparative profile

0.00

Group support

0.00

Government support

0.00

Peer analysis

0.00

   

Total Score

10,75

Glossary

Balance Sheet

Also known as 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.

Cash

Funds that can be readily spent or used to meet current 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.

Diversification

Spreading risk by constructing a portfolio that contains different exposures whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.

Exposure

Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For a company, its exposure may relate to a particular product class or customer grouping. Exposure may also arise from an overreliance on one source of funding. In insurance, it refers to an individual or company’s vulnerability to various risks

Income

Money received, especially on a regular basis, for work or through investments.

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.

Issuer

The party indebted or the person making repayments for its borrowings.

Leverage

With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.

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. 

Long Term Rating

See GCR Rating Scales, Symbols and Definitions.

Margin

A term whose meaning depends on the context. In the widest sense, it means the difference between two values.

Market

An assessment of the property value, with the value being compared to similar properties in the area.

Maturity

The length of time between the issue of a bond or other security and the date on which it becomes payable in full.

Rating Outlook

See GCR Rating Scales, Symbols and Definitions.

Risk

The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.

Short Term Rating

See GCR Rating Scales, Symbols and Definitions.

Short Term

Current; ordinarily less than one year.

SALIENT POINTS OF ACCORDED RATINGS

GCR affirms that a.) no part of the ratings 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 not been disclosed to the rated entity.

The ratings were unsolicited, and therefore, GCR has been not been compensated for the provision of the ratings.

Equity Group did not participate in the ratings process, however the quality of public disclosure from audited accounts and risk management booklets, alongside regulatory returns, meets out information sufficiency requirements.

 

 

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