Johannesburg, 30 June 2016 — Global Credit Ratings has assigned national scale ratings to KCB Bank Kenya Limited of AA(KE) and A1+(KE) in the long term and short term respectively; with the outlook accorded as Stable. The ratings are valid until June 2017.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to KCB Bank Kenya Limited (“KCB Bank”, “the bank”) based on the following key criteria:
The ratings of KCB Bank are in line with the ratings previously assigned to Kenya Commercial Bank Limited (renamed KCB Group Limited, following a group restructuring process). KCB Group Limited (“KCB Group”, “the group”), from 1 January 2016, is a non-operating holding company. KCB Bank is a wholly-owned subsidiary of the group and the main operating entity (accounting for 83.8% of group assets at FYE15). The group’s regional banking subsidiaries and non-banking subsidiaries in Kenya are held at the holding company level.
KCB Bank’s ratings reflect its intrinsic credit strength and are premised on its established domestic franchise, significant market share, acceptable risk management practices, profitable business model, and support from its shareholders.
Over the past five years, the bank has had strong asset growth which has led to its capital adequacy ratios approaching the regulatory minima. As a result, the group’s shareholders (at its Annual General Meeting held in April 2016) approved the bank’s plan to raise KES10bn through a rights issue by end-2016. The total proceeds from the capital raising exercise will be used to strengthen the bank’s capital base, support growth and onward lending activities, and fund investments in IT and other product development initiatives.
Rapid loan growth in a rising interest rate environment brought about a slight deterioration in the quality of the bank’s loan book. The gross non-performing loan (“NPL”) ratio rose from 5.2% at FYE14 to 6.0% at FYE15, but remains at an acceptable level. Although provisioning is deemed low, the bank’s earnings provide an additional buffer to absorb losses.
The bank’s consistent track record of positive returns was once again evident in F15, when it posted a profit before tax of KES23.4bn (F14: KES22.4bn), driven by growth in business and client volumes and operational efficiencies.
Liquidity buffers were deemed sufficient. The bank maintained an average net liquid assets to customer deposits ratio of 30.3% during F15 (F14: 36.1%), which was well above the minimum requirement of 20%.
KCB Bank’s leading market position within the Kenyan banking space and strong business and financial profile position it well to take advantage of a potential flight to quality, and manage the difficult operating environment.
Transition from significant to dominant market share or a material positive change in the group’s support assessment may warrant an upward adjustment of KCB Bank’s long-term rating (currently the highest rating for a Kenyan bank accorded by GCR). A ratings downgrade may be triggered by further weakening in capital adequacy ratios (as a result of an unsuccessful rights issue), credit losses materially above expectations, higher than anticipated negative liquidity gaps, less stringent credit norms, a weaker franchise, and diminished support, along with the impact of economic/industry turbulence on operations.
NATIONAL SCALE RATINGS HISTORY
Initial rating (Jun/2013)*
Long term: AA(KE); Short term: A1+(KE)
Last rating (Jun/2015)*
Long term: AA(KE); Short term: A1+(KE)
* Kenya Commercial Bank Limited’s ratings.
Sector Head: Financial Institution Ratings
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2016
Kenya Bank Statistical Bulletin (December 2015)
Kenya Operating Environment Overview (May 2016)
Kenya Commercial Bank Limited rating reports (2013-15)
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.
KCB Bank Kenya Limited participated in the rating process via teleconferences 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 KCB Bank Kenya Limited with no contestation of the rating.
- The information received from KCB Bank Kenya Limited and other reliable third parties to accord the credit ratings included: Audited financial results of the bank and the group as at 31 December 2015 (and four years of comparative numbers)
- 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
- Industry comparative data
The rating above was solicited by, or on behalf of, KCB Bank Kenya 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.|
|Audit Report||A written opinion of an auditor (attesting to the financial statements’ fairness and compliance with generally accepted accounting principles).|
|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||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 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.|
|Customer Deposit||Cash received in exchange for a service, including safekeeping, savings, investment, etc. Customer deposits are a liability in a bank’s books.|
|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.|
|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.|
|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 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.|
|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.|
|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.|
|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.|
|Provision||The amount set aside or deducted from operating income to cover expected or identified loan losses.|
|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.|
|Risk Management||Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy.|
|Securities||Various instruments used in the capital market to raise funds.|
|Security||An asset deposited or pledged as a guarantee of the fulfilment of an undertaking or the repayment of a loan, to be forfeited in case of default.|
|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.|
|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 assigns a rating of AA(KE) to KCB Bank Kenya Limited; Outlook Stable.