Announcements Financial Institutions Rating Alerts

GCR affirms the ratings of Diamond Trust Bank Limited at A+(KE)/A1(KE), Outlook Stable.

Rating Action

Johannesburg, 1 October 2019 – GCR Ratings (“GCR”) has affirmed the long and short-term Kenyan national scale ratings of Diamond Trust Bank Limited (“DTB”) at A+(KE) and A1(KE) respectively, and accorded the outlook as stable.

Rated Entity / Issue Rating class Rating scale Rating Outlook / Watch
Diamond Trust Bank Limited Issuer Long Term National A+(KE) Stable Outlook
Issuer Short Term National A1(KE)

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.

Rating Rationale

The Kenyan national scale ratings on DTB Limited reflect the strengths and weaknesses of the DTB Group (‘the group’). The group has a solid franchise with operations in Kenya, Uganda, Tanzania, and Burundi. The ratings balance the group’s good market position, positive geographic and business line diversification, adequate levels of capitalisation, a strong funding and liquidity profile, against a moderate risk position, given the high forex risk from the large foreign currency lending book, low levels of reserving and high cost of funding.

The group’s operations are predominantly in Kenya (approximately 76% of total group loans) while banking operations in Tanzania contributes 14%, Uganda 9%, and Burundi 1% of loans. The group also includes a 100% stake in Diamond Trust Insurance Agency Limited, Network Insurance Agency Limited (Uganda) and a 20% stake in The Jubilee Insurance Company of Burundi S.A. DTB offers a wide range of corporate, retail and commercial banking services, targeting mainly Small and Medium Enterprises. It is a tier 1 bank in Kenya, ranked 6th with a market share of 6.7% by advances, deposits and assets and has good geographic diversification with a large branch network. Earnings have been fairly stable but lower than top tier peers over the past few years, largely due to structurally higher cost of funds.

DTB’s capitalisation is considered to be adequate, with the GCR capital ratio expected to remain in the 20% -22% range in the next 24 months, supported by stable earnings and moderate risk asset growth. We anticipate that the group’s return on assets will range between 2.4%-2.8% over the next two years, reflecting strong efficiency (with a cost ratio expected to be below 39%) and stable non-interest income. However, reserving is currently considered to be modest with loan loss coverage ratio of 66%, although there is currently an adequate level of collateral coverage against the largest non-performing loans (“NPLs”). GCR expects the reserving to improve with the limited growth expected on the loan book over the year or two.

The risk position is a negative rating factor, as a result of the high forex risk exposure. Foreign currency (“FCY”) advances make up 49% of the group’s total loan book, compared to the market average of around 35%, which exposes the group’s credit book to exchange rate movements. Positively, around two-thirds of FCY loans are extended to borrowers with external USD revenues, and the bank withholds the right to convert all FCY loans to KES should there be a currency stress. Furthermore, the group has a small net open forex position, which reduces the translation risk. The bank’s NPLs at 6% at 1H 19 are better than peers (tier 1 average: 7.6%), while its credit losses are higher than some tier 1 peers.

The funding and liquidity position is broadly positive for the bank, with a stable GCR funding ratio of 83%, and a long term funding ratio of 109%. The group has a well-diversified funding base, with retail deposits contributing 52% of total deposits. Depositor concentrations are low with the top 20 to total deposits at 11%, while the highest single depositor is 2% of total deposits. GCR also views the significant funding from Agha Khan related institutions as a positive rating factor, as it speaks to the support from the shareholder, provides stable funding and contributes to liquidity. DTB’s liquidity position is strong, with a GCR liquid to total wholesale funding ratio of 4.7x and a GCR liquid assets to customer deposits ratio of 53%.

Outlook

The outlook is stable, reflecting the core scenario that the robust economic growth and stable KES will be maintained over the next 12 months. However, given the bank’s significant FCY lending exposure, we could lower the ratings if the KES depreciates from its currently managed levels, as we would expect some asset quality deterioration. Furthermore, given the modest levels of provisioning, the impact through profit and loss may be exacerbated.

Rating Triggers

The national scale ratings could be lowered if there is a material KES depreciation, because we think it will likely lead to asset quality deterioration. We may also bring down the rating if the credit losses start to compare badly to rated peers. Furthermore, capital deterioration (GCR capital ratio below 20%) or severe earnings pressure could bring down the ratings. We do not foresee any upside for the rating over the next 12 months.

Analytical Contacts

Primary analyst Simbarake Chimutanda Financial Institutions Analyst
Johannesburg, ZA SimbarakeC@GCRratings.com +27 11 784 1771
Secondary analyst Victor Matsilele Financial Institutions Associate
Johannesburg, ZA VictorM@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, July 2019

Ratings History

Diamond Trust Bank Limited

Rating class Review Rating scale Rating class Outlook Date
Issuer Long Term Initial National A+(ke) Stable September 2011
Last National A+(ke) Stable May 2018
Issuer Short Term Initial National A1(ke) Stable September 2011
Last National A1(ke) Stable May 2018

Risk Score Summary

Risk score DTB
Operating environment 7.5
Country risk score 4.0
Sector risk score 3.5
Business profile 1.0
Competitive position 1.0
Management and governance 0.0
Financial profile 1.0
Capital and Leverage 0.5
Risk -0.5
Funding structure and Liquidity 1.0
Comparative profile 0.5
Group support 0.0
Peer analysis 0.5
Total Score 10.0
National Scale Rating A+(KE)/A1(KE)

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 ratings were 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; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

DTB Bank Limited did not participate in the rating process, though GCR is satisfied that the public information available was sufficient. The ratings above were unsolicited and accorded based on publicly available information. The information used to analyse DTB Bank Limited and accord the credit ratings included:

  • Audited financial results as at 31 December 2018 (and four years of comparative numbers);
  • Industry comparative data; and
  • Other publicly available information.


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