Johannesburg, 8 July 2016 — 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 ratings are valid until July 2017.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Victoria Commercial Bank Limited (“VCB” and/or “the bank”) based on the following key criteria:
The ratings of VCB reflect its successful relationship-based niche private banking model and broadly stable credit profile, supported by robust asset quality, comfortable capitalisation, strong liquidity 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 during F15, recording Tier 1 and total capital adequacy ratios of 18.6% and 19.3% respectively at FYE15 (FYE14: 18.2% and 19.2%). This was supported by the bank’s high profit retention (with balance sheet retained earnings growing by 40.8%) and additional capital of KES56m.
The bank has consistently maintained robust asset quality, recording zero non-performing loans (“NPLs”) for over a decade. The bank’s exceptional asset quality 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.
Pre-tax earnings grew by a four year high of 44.8% to KES919.1m in F15, mainly driven by a 35.6% increase in interest income (due to growth in loans), and a review period high 113.9% increase in non-interest income (supported by a once off gain from the sale of an associate which contributed 55.3% to non-funded income, and improved fee and commission income). The combined rise of the aforementioned factors more than offset the 46.8% increase in funding costs and 35% increase in operating expenditure (driven by increased staff costs, branch expansion costs and IT related expenses). The bank’s ROaA and ROaE increased to 3.8% and 22.4% respectively in F15 (F14: 3.0% and 17.2%).
In spite of negative contractual gaps in the bank’s short-term maturity buckets (a structural industry feature), VCB preserves adequate liquidity buffers and maintains its liquidity ratio well above the minimum regulatory requirement of 20%.
GCR considers the broader context of market position as one of its rating factors. Market position is based on the bank’s market share and core competences, and the advantages and vulnerabilities arising from its market position are examined. 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 (October 2012)|
|Long-term: BBB(KE); Short-term: A3(KE)|
|Last rating (August 2015)|
|Long-term: BBB(KE); Short-term: A2(KE)|
|Primary Analyst||Committee Chairperson|
|Kuzivakwashe Murigo||Omega Collocott|
|Credit Analyst||Sector Head: Financial Institution Ratings|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other updated March Financial Institutions, updated March 2016
Kenya Bank Statistical Bulletin 2015 (December 2015)
Kenya Operating Overview (May 2016)
VCB rating reports (2012-15)
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 ratings have been disclosed to Victoria Commercial Bank Limited with no contestation of the ratings.
Information received from Victoria Commercial Bank Limited and other reliable third parties to accord the credit ratings included:
- Audited financial results as at 31 December 2015 (and four years comparative numbers)
- Unaudited interim results at 31 March 2016
- Budgeted financial statements for 2016
- 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 SECTOR GLOSSARY
|Asset||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|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 (ie, being paid back in accordance with their terms) and the likelihood that they will continue to perform.|
|Balance Sheet||Also known as a 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.|
|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.|
|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.|
|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.|
|International Scale Rating LC||International local currency (International LC) ratings measure the likelihood of repayment in the currency of the jurisdiction in which the issuer is domiciled. Therefore, the rating does not take into account the possibility that it will not be able to convert local currency into foreign currency or make transfers between sovereign jurisdictions.|
|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||Not current; ordinarily more than one year.|
|Long-Term Rating||Reflects an issuer’s ability to meet its financial obligations over the following three to five year period, including interest payments and debt redemptions. This encompasses an evaluation of the organisation’s current financial position, as well as how the position may change in the future with regard to meeting longer term financial obligations.|
|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||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.|
|Performing Loan||A loan is said to be performing if the borrower is paying the interest on it on a timely basis.|
|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.|
|Retained Earnings||Earnings not paid out as dividends by a company. Retained earnings are typically reinvested back into the business and are an important component of shareholders’ equity.|
|Short-Term||Current; ordinarily less than one year.|
|Short-Term Rating||An opinion of an issuer’s ability to meet all financial obligations over the upcoming 12 month period, including interest payments and debt redemptions.|
For a detailed glossary of terms utilised in this announcement please click here
GCR affirms Victoria Commercial Bank Limited’s rating of BBB(KE) ; Outlook Stable.