Johannesburg, 5 Aug 2015 — Global Credit Ratings has affirmed the national scale ratings assigned to Victoria Commercial Bank Limited of BBB(KE) and A2(KE) in the long term and short term respectively; with the outlook accorded as Stable. The rating(s) are valid until August 2016.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating(s) to Victoria Commercial Bank Limited (“VCB”) based on the following key criteria:
The ratings of VCB reflect its successful relationship-based niche private banking model and broadly stable credit profile, underpinned by excellent asset quality, comfortable capitalisation and sound profitability. The bank’s ratings are, however, constrained by its relatively small size, which implies low systemic importance relative to the larger local banks.
VCB maintained healthy capitalisation ratios, with reported core and total capital adequacy ratios of 18.2% and 19.2% respectively at FYE14 (FYE13: 19.8% and 20.4%). This has been supported by the bank’s high profit retention over the years, and most recently, a rights issue of KES18m in F14. However, additional capital might be desirable in the future if the growth in risk weighted assets continues to outpace capital generation (as seen in the previous two years), or if minimum capital proposals (requiring banks to hold at least KES5bn in core capital by December 2018) come into effect.
The bank has maintained an excellent credit history, with no loans classified as non-performing for over a decade. The bank’s outstanding asset quality is partly a function of the niche market in which it operates, but most importantly reflects its stringent credit origination standards and proactive post disbursement monitoring. Given VCB’s client selectivity, credit concentrations within its lending portfolio are high. However, GCR takes comfort from the bank’s disciplined underwriting approach.
VCB recorded a moderate increase in its net income of 7.7% in F14 (F13: 23.2%; F12: 52.2%). Consequently, profitability in terms of return on average assets has declined over the last couple of years to 3.0% and 3.6% in F14 and F13 respectively (F12: 3.7%), as net interest margins narrowed as a result of competitive pressures. Nonetheless, profitability and efficiency metrics remain healthy.
Despite the large maturity mismatch between interest-earning assets and liabilities, liquidity risk is mitigated to a large extent by maintaining a reasonable discretionary buffer of highly tradable marketable securities (mainly government securities) and other liquid assets. In this regard, VCB maintains its liquidity ratio above the required statutory liquidity ratio of 20%.
GCR considers the broader context of market position as one of its key rating factors. Market position is based on the bank’s market share and core competences; advantages and vulnerabilities arising from its market position are examined, with emphasis on diversification, strategy, management and systems. As such, VCB’s ratings could be positively impacted by substantial gains in market share, while maintaining stable profitability, asset quality and capitalisation. Furthermore, the bank’s ratings would benefit from increased diversification of both earnings and funding. Downward pressure on VCB’s ratings could stem from a deterioration in macroeconomic conditions, which could adversely affect its asset quality, capital base and earnings power and/or negative changes in the bank’s financial profile.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (Oct/2012)|
|Long term: BBB(KE); Short term: A3(KE)|
|Last rating (Aug/2014)|
|Long term: BBB(KE); Short term: A2(KE)|
|Sector Head: Financial Institution Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2015
Kenyan Bank Statistical Bulletin (June 2015)
VCB rating reports (2012-14)
RATING LIMITATIONS AND DISCLAIMERS
ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.NET/RATINGS-INFO. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.NET.
SALIENT FEATURES 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.
Victoria Commercial Bank Limited 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 credit rating/s has been disclosed to Victoria Commercial Bank Limited with no contestation of the rating/s.
Information received from Victoria Commercial Bank Limited and other reliable third parties to accord the credit rating(s) included:
- Audited financial results as at 31 December 2014
- Unaudited interim results at 31 May 2015
- 4 years of comparative numbers
- Budgeted financial statements for 2015
- Latest internal and/or external audit report to management
- A breakdown of facilities available and related counterparties
- Corporate governance and enterprise risk framework
The ratings above were solicited by, or on behalf of, Victoria Commercial Bank Limited, and therefore, GCR has been compensated for the provision of the ratings.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S FINANCIAL INSTITUTIONS GLOSSARY
|Asset||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|Asset Quality||Asset quality refers primarily to the credit quality of a bank’s earning assets, the bulk of which comprises its loan portfolio, but will also include its investment portfolio as well as off balance sheet items. Quality in this context means the degree to which the loans that the bank has extended are performing (i.e. being paid back in accordance with their terms) and the likelihood that they will continue to perform.|
|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|Capital||The sum of money that is invested to generate proceeds.|
|Capital Adequacy||A measure of the adequacy of an entity’s capital resources in relation to its current liabilities and also in relation to the risks associated with its assets. An appropriate level of capital adequacy ensures that the entity has sufficient capital to support its activities and that its net worth is sufficient to absorb adverse changes in the value of its assets without becoming insolvent.|
|Capital Base||The issued capital of a company, plus reserves and retained profits.|
|Corporate Governance||Corporate governance broadly refers to the mechanisms, processes and relations by which corporations are controlled and directed, and is used to ensure the effectiveness, accountability and transparency of an entity to its stakeholders.|
|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.|
|Credit Rating Agency||An entity that provides credit rating services.|
|Credit Risk||The possibility that a bond issuer or any other borrowers (including debtors/creditors) will default and fail to pay the principal and/or interest when due.|
|Creditworthiness||An assessment of a debtor’s ability to meet debt 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 investments, 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.|
|Exchange||A standardised marketplace in which different assets are traded.|
|Financial Institution||An entity that focuses on dealing with financial transactions, such as investments, loans and deposits.|
|Financial Statements||Presentation of financial data including balance sheets, income statements and statements of cash flow, or any supporting statement that is intended to communicate an entity’s financial position at a point in time.|
|Income Statement||A summary of all the expenditure and income of a company over a set period.|
|Insolvent||When an entity’s liabilities exceed its assets.|
|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.|
|Interest Rate||The charge or the return on an asset or debt expressed as a percentage of the price or size of the asset or debt. It is usually expressed on an annual basis.|
|International Scale Rating||ISRs relate to either foreign currency or local currency commitments, assessing the capacity of an issuer to meet these commitments using a globally applicable (and therefore internationally comparable) scale.|
|Liabilities||All financial claims, debts or potential losses incurred by an individual or an organisation.|
|Liquid Assets||Assets, generally of a short term, that can be converted into cash.|
|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.|
|Liquidity Risk||The risk that a company may not be able to meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets. Regarding securities, the risk that a financial instrument cannot be traded at its market price due to the size, structure or efficiency of the market.|
|Long term||Not current; ordinarily more than one year.|
|Margin||The rate taken by the lender over the cost of funds, which effectively represents the entity’s profit and remuneration for taking the risk of the loan; also known as spread.|
|Maturity||The length of time between the issue of a bond or other security and the date on which it becomes payable in full.|
|National Scale Rating||The national scale provides a relative measure of creditworthiness for rated entities only within the country concerned. Under this rating scale, a ‘AAA’ long term national scale rating will typically be assigned to the lowest relative risk within that country, which in most cases will be the sovereign state.|
|Net Interest Margin||Net interest margin is the net interest income divided by average interest earning assets.|
|Off Balance Sheet||Off balance sheet items are assets or liabilities that are not shown on a company’s balance sheet. They are usually referred to in the notes to a company’s accounts.|
|Portfolio||A collection of investments held by an individual investor or financial institution. They may include stocks, bonds, futures contracts, options, real estate investments or any item that the holder believes will retain its value.|
|Rights Issue||One of the ways that a company can raise additional funds is to issue new shares. These must be first offered to current shareholders and a rights issue allows a shareholder to buy shares in proportion to the number already held.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Shareholder||An individual, entity or financial institution that holds shares or stock in an organisation or company.|
|Short Term||Current; ordinarily less than one year.|