Johannesburg, 22 September 2020 – GCR Ratings (“GCR”) has affirmed the Kenyan long and short-term issuer ratings on Victoria Commercial Bank Limited of BBB+(KE)/A2(KE), with outlook revised to Negative.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook / Watch|
|Victoria Commercial Bank Limited||Long Term issuer||National||BBB+(KE)||Negative Outlook|
|Short Term issuer||National||A2(KE)|
The ratings on Victoria Commercial Bank Limited’s (‘VCB’, ‘the bank’) reflect its strengths and weaknesses as a tier 3 bank, balancing its niche position, adequate capitalisation, good risk position, and moderate funding and liquidity. The negative outlook is based on the possibility of asset quality metrics deteriorating beyond our expectations, given the concentration to vulnerable sectors of the economy.
VCB’s competitive position is a rating weakness given its small size compared with the large and diverse top tier institutions. The bank is positioned as a tier 3 bank in a market that has seen some consolidation during the year. Its share of the industry assets is less than 1% as of 30 June 2020, and we believe the bank has a limited retail deposits franchise which increases its cost of funds. Nonetheless, we view the bank to target a niche market segment that is fairly defendable, and its core strength lies in its relationship banking business model that has proved to be stable over the years. Track record of revenue stability is good, benefiting from a nimble organisational structure and good capital management.
Capitalisation is a neutral ratings factor. The GCR total capital ratio of 18.4% as at 30 June 2020 is considered to be adequate. We expect the ratio to moderate by close to 100bps to around 17.5% over the next 18-24 months, balancing the anticipated risk asset growth, beyond adequate loan loss reserving and modest earnings. The total loan loss reserve coverage of NPLs was 84% at 30 June 2020, which exceeds the sector average. Through the cycle earnings (after tax) have been modest, with the bank returning just over 1% of assets (c.1.1% at 30 June 2020). We expect modest growth in earnings, based on anticipated loan growth and stable cost structure, moderated for somewhat volatile non-funded income streams.
Risk position is a positive ratings factor, given better than sector average NPLs and credit losses especially against lower tier peers. The bank has traditionally reported stronger asset quality metrics than most banks, with NPLs trending well below 2% through the cycle until recently. The NPL ratio was 4.9% at December 2019, edging higher to 6.3% as of June 2020, but still remaining well below sector and peer average. We expect the NPL ratio increase to around 7%-7.3% over the next 2 years, while cost of risk is likely to remain stable at 1.1%. Our view is supported by the fact that VCB’s loan book is concentrated to vulnerable sectors (manufacturing and real estate account for c.50% of the book), driving the majority of the current NPLs. Combined with the aftermath effects of the COVID-19 crisis, we expect asset quality metrics to remain pressured. The diversification of the bank’s manufacturing customers partly mitigates the downside risk. Foreign currency lending (20% of the loan book) is broadly in line with the sector average and the risk is well managed as reflected by fewer accounts in default. The bank’s natural hedging also minimises market risk.
Funding and liquidity is a slight positive ratings factor, balancing a fairly stable funding structure for a tier 3 bank and good liquidity that is better than lower tier peers. The funding composition is largely term deposits (70%), with the balance being retail. Positively, term deposits have proven to be sticky, supporting the bank’s GCR stable funding ratio (customer deposits plus long term borrowings/total funding) of c.95% as of 30 June 2020. Liquidity is supported by the very short-term loan book that has c.50% of exposures maturing within 12 months. The bank also maintains a good regulatory liquidity coverage ratio of 37% as at 30 June 2020 vs the required minimum of 20%.
The negative outlook is based on the possibility of asset quality metrics deteriorating beyond our expectations, given the concentration to vulnerable sectors of the economy. The strained operating environment, coupled with concentration in vulnerable sectors, is likely to weigh on the bank’s asset quality metrics and earnings. As a result, we expect NPL ratio to increase to around 7%-7.3%, while the GCR capital ratio moderates to around 17.5% over the rating horizon. The competitive position, funding and liquidity are expected to remain stable.
A downgrade could be caused by sustained higher NPLs and credit losses beyond 7.5% and 1.5% respectively, and lower than 15% GCR capital ratio. The upside to the ratings is limited, although increased business diversification, a stronger funding structure, and stronger capitalisation could result in an upward rating migration.
|Primary analyst||Simbarake Chimutanda||Financial Institutions Analyst|
|Johannesburg, ZA||SimbarakeC@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, June 2020|
|GCR Financial Institutions Sector Risk Score, August 2020|
Victoria Commercial Bank Limited
|Rating class||Review||Rating scale||Rating class||Outlook||Date|
|Long Term issuer||Initial||National||BBB(KE)||Stable||October 2012|
|Short Term issuer||Initial||National||A3(KE)||—||October 2012|
Risk score summary
|Rating Components & Factors||Risk scores|
|Country risk score||4.00|
|Sector risk score||3.50|
|Management and governance||0.00|
|Capital and Leverage||0.00|
|Funding and Liquidity||0.50|
|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.|
|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.|
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 been disclosed to the rated entity. The ratings were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings.
Victoria Commercial Bank Limited participated in the rating process via teleconference 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 the entities and other reliable third parties to accord the credit ratings included:
- Audited financial results as at 31 December 2019;
- Unaudited half year results for 2020;
- Latest internal and/or external audit report to management;
- A breakdown of facilities available and related counterparties; and
- Industry comparative data.