Nairobi, 30 July 2021 – GCR Ratings (“GCR”) has affirmed the unsolicited national scale long and short-term issuer credit ratings of Equity Group Holdings Plc at AA-(KE)/A1+(KE) respectively, with the outlook revised to Stable.
|Rated Entity||Rating class||Rating scale||Rating||Outlook/Watch|
|Equity Group Holdings Plc||Long Term Issuer||National||AA-(KE)||Stable|
|Short Term Issuer||National||A1+(KE)||–|
The unsolicited ratings on Equity Group Holdings Plc (“Equity Group”, “the Group”) reflect the Group’s strong competitive position, adequate capitalisation supported by strong earnings, above average risk position coupled with a solid funding base and robust liquidity. The stable outlook reflects the better than anticipated performance resilience and financial stability amidst heightened economic and sector risks, which saw credit losses escalate and earnings restrained 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 1Q21, the group operated banking franchises across six markets, namely Kenya (contributing 66% of group loans), Democratic Republic of Congo (17%), Uganda, Tanzania, and Rwanda (combined c.17%) and South Sudan (<1%). The group also operates four non-bank entities, predominantly in Kenya, that provided around 4.2% of profit before tax (“PBT”) as at 1Q21.
Within its core market of Kenya, the bank is a tier one institution with a c.12.2% deposit market share. The revenue stability of the Group has been dynamic over the past four years, consistently growing interest and non-interest income with a relatively high contribution of non-interest income at c.42% of operating revenues as at1Q21. A relatively low cost of funds at approximately 2.5% is positive to enhancing revenues for the Group.
With a GCR capital ratio of around 13.7% at 1Q21 and 14.6% in FY20, we consider the capitalisation of the group to be at the higher end of the low range. However, our assessment is supported by robust internal capital generation, which has averaged 22% over the past three years. Therefore, despite the significant strain from the operating environment, we expect recovery in earnings to boost the capital base with a return on assets of around 4% in FY21. Our expectations balance revenue growth of around 7%-10%, a cost to income ratio of around 50% and a slight reduction in net interest margins due to a higher rate of growth on earning assets. Going forward, we expect non-performing loans to moderate to around 10%-11% of total loans as the structured loan portfolio shifts back to repayment. We see cost of risk reversing to levels of 2.0% -3.0% in FY21/22 from a high of 5.8% in FY20. At the same time, we expect asset growth to range between 7%-10%.
The Group has achieved a cost of risk below 2.5% for the past five years (with exception of FY20), which compares well to the market average, despite non-performing loans broadly being in line with top tier peers. There has been a relative recovery in asset quality and cost of risk in the first quarter of 2021 with loans under moratorium improving to 19% from 23% in December 2020, and we expect the recovery to continue. We also factor in the positive loan book diversification both geographically and by industry/sector into the risk position assessment. Around 41% 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 as at 1Q21. Deposits are split rather evenly between retail at 42% and corporate at 58%. 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 to be very strong, with broad liquid assets covering 5.5x wholesale funding or 60% 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.
The outlook is stable, given the resilience of the banking sector and the banking group as a whole amidst a tough operating environment as underscored by heightened economic and sector risks. Specifically, we are expecting continued recovery of local banks in Kenya and East Africa as a whole, which lowers counterparty risks. Furthermore, we are factoring in the recuperation in asset quality, earnings, and capitalisation of the group for the next 12 months. As a result, we are anticipating cost of risk to moderate for the group and to remain below the regional average.
A downgrade could arise from a sustained sector instability, deteriorating asset quality and capital position, as a result of weakening earnings. Positive rating action is unlikely in the current environment but improved internal capital generation against risk-weighted asset growth and better asset quality could improve the ratings.
|Primary analyst||Dennis Kariuki||Senior Financial Institutions Analyst|
|Nairobi, KE||DennisK@GCRratings.com||+27 11 784 1771|
|Committee chair||Vinay Nagar||Senior Financial Institutions Analyst|
|Johannesburg, ZA||Vinay@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, July 2021|
|GCR Financial Institutions Sector Risk Score, June 2021|
Equity Group Holdings Plc
|Rating class||Review||Rating scale||Rating class||Outlook||Date|
|Long Term Issuer||Initial||National||A(KE)||Stable||July 2005|
|Short Term Issuer||Initial||National||A1-(KE)||n.a||July 2005|
RISK SCORE SUMMARY
|Rating Components & Factors||Risk scores|
|Country risk score||3.50|
|Sector risk score||3.25|
|Management and governance||0.00|
|Capital and Leverage||(0.50)|
|Funding and Liquidity||1.50|
|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 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.