Johannesburg, 31 August 2017 — Global Credit Ratings (“GCR”) has today downgraded NIC Bank Limited’s long-term and short-term national scale ratings to A(KE) and A1-(KE) respectively; with the outlook accorded as Stable. The ratings are valid until August 2018.
SUMMARY RATINGS RATIONALE
The ratings of NIC Bank Limited (“NIC”, “the group”) reflect its long history and established market position in Kenya, built off the back of its pioneering work in asset finance and corporate banking, although the group under its current three year strategic cycle has shifted business focus towards the retail and small and medium sized enterprise (“SME”) segments. The ratings also factor in the group’s strong capitalisation and operational efficiencies that cushion risks of financial underperformance. However, the group’s high risk profile loan book has required higher provisioning, which in turn has put pressure on earnings and capital.
NIC has regional presence, with cross border banking subsidiaries in Tanzania and Uganda that contributed a combined 4.5% of the group’s consolidated assets at FY16 (FY15: 6.5%).
Capitalisation remained strong supported by a changing asset mix that reduced balance sheet risk. In that regard, the group’s Tier 1 and total capital adequacy ratios increased slightly to 17.2% and 21.6% at FY16 respectively, well above the minimum statutory requirements of 10.5% and 14.5% correspondingly.
The gross non-performing loan (“NPL”) ratio decreased slightly to 10.8% at FY16 (FY15: 11.2%), driven by a cautious lending strategy that slowed credit growth and shifted focus on the group’s recovery efforts. However, the level of past due but not impaired loans plus NPLs (net of provisions) increased significantly to 80.7% of core capital at FY16 (FY15: 66.2%), indicating heightened risks to group capital. Furthermore, the implementation of IFRS 9 in 2018 is expected to negatively impact earnings through increased loan impairment provisioning, given the specific provision coverage of NPLs remained low (albeit it increased from FY15 levels) at 39% at FY16.
In FY16, profitability weakened with group earnings registering a 3.4% decline to KES4.3bn. Overcoming headwinds to earnings growth, net interest margin (“NIM”) improved in FY16 to 7.8% (FY15: 7.3%), driven by a positive endowment of the group’s current funding structure that resulted in lower borrowing costs. However, the group’s high risk profile loan book has required higher provisioning, which saw the credit loss ratio rise to 3.2% (FY15: 1.5%) at FY16, diminishing the group’s NIM on a risk adjusted basis. The group stepped up efforts to reach optimal efficiency, with cost/income ratio further declining to 38.4% at FY16 (FY15: 41.2%). Overall, ROaE and ROaA declined to 15.5% and 2.6% at FY16 respectively (FY15: 18.4% and 2.9%).
The group’s liquidity profile was reflective of the industry norm, characterised by negative asset/liability mismatch in the 0-12 months maturity buckets. Nevertheless, the group maintained a liquidity ratio above the prudential minimum of 20%.
Total liability funding decreased 1.6% at FY16, largely owing to a decline in customer term and bank deposits. The group’s loan book is primarily funded by interest bearing customer deposits (largely comprising term and savings deposits combined), complemented by wholesale debt raised from international financiers. That said, growing low/zero cost funding (current account deposits) and having an optimal variable/fixed rate funding mix will be key in preserving interest margins.
Substantial improvement in asset quality, and stronger earnings generation enhanced by strengthening of the group’s competitive position in the SME and retail banking segments, could positively impact the ratings. Maintaining a high risk profile loan book while shareholder support in the form of capital injections diminishes, coupled with weakening earnings generation, could prompt a negative rating action. Furthermore, downward pressure could stem from underperformance of the SME and retail banking loan books.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (August 2002)||Last rating (August 2016)|
|Long-term: A+(KE); Short-term: A1(KE)||Long-term: A+(KE); Short-term: A1(KE)|
|Outlook: Stable||Outlook: Negative|
|Sector Head: Financial Institution Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions (March 2017)
Kenya Bank Statistical Bulletin (December 2016)
NIC Bank Limited rating reports (2002-16)
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.
NIC Bank Limited participated in the rating process via teleconference management meeting 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 NIC Bank Limited with no contestation of the ratings.
Information received from NIC Bank Limited and other reliable third parties to accord the credit ratings included:
• Audited financial results of the group as at 31 December 2016 (and four years comparative numbers);
• Unaudited interim results of the group as at 30 June 2017;
• Budgeted financial statements for 2017;
• Latest internal and/or external audit report to management;
• A breakdown of facilities available and related counterparties;
• Corporate governance and enterprise risk framework; and
- Industry comparative data and regulatory framework.
The ratings above were solicited by, or on behalf of, NIC 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||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.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Customer Deposit||Cash received in exchange for a service, including safekeeping, savings, investment, etc. Customer deposits are a liability in a bank’s books.|
|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.|
|Equity||Equity (or shareholders’ funds) is the holding or stake that shareholders have in a company. Equity capital is raised by the issue of new shares or by retaining profit.|
|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.|
|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.|
|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||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 income divided by average interest earning assets. Measures a bank’s margin after paying funding sources and how successful a bank’s interest-related operations are.|
|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.|
|Regulatory Capital||The total of primary, secondary and tertiary capital.|
|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.|
|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 glossary of terms please click here
GCR downgrades NIC Bank Limited’s rating to A(KE); Outlook Stable.