Nairobi, 26 August 2021 – GCR Ratings (“GCR”) has downgraded the Kenyan long and short-term issuer ratings on Victoria Commercial Bank Limited to BBB(KE)/A3(KE) from BBB+(KE)/A2(KE), respectively. The outlook is revised to Stable.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook / Watch|
|Victoria Commercial Bank Limited||Long Term Issuer||National||BBB(KE)||Stable Outlook|
|Short Term Issuer||National||A3(KE)|
The ratings downgrade on Victoria Commercial Bank Limited’s (‘VCB’, ‘the bank’) has been triggered by a decline in asset quality largely due to the adverse impact of the Covid-19 pandemic, as reflected by the c.100% year-on-year expansion in non-performing loans at 1H2021. However, the rating continues to be positively supported by VCB’s niche market position, adequate capitalisation, and strong funding and liquidity. The stable outlook is based on the expectations of moderation in asset quality metrics on the back of recovery efforts and easing operating environment pressures.
The bank is currently positioned as the top tier 3 bank in Kenya with its market share recorded at 0.7% as of 30 June 2021 and in addition it outperforms peers on asset quality, efficiency, and return on assets. Furthermore, we view the bank to target a niche market segment that has proved to be 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. We, however, believe the bank has a limited retail deposits franchise which elevates its cost of funding the balance sheet although we note efforts to grow cheaper retail deposits moving forward. However, VCB’s relatively small size and limited distribution network compared with the large and diverse top tier institutions is a negative ratings factor.
Capitalisation is a neutral ratings factor. The GCR total capital ratio of 16.8% as at 30 June 2021 is considered to be adequate anchored further by a GCR leverage ratio of 15.6%. We expect the ratio to remain stable over the next 18-24 months, balancing a healthy internal capital generation capacity and growth in risk assets. The total loan loss reserve coverage of 62% on NPLs as at 30 June 2021 provides a fairly adequate buffer to absorb losses. Through the earnings cycle, profit after tax has been modest with the bank returning around 1% of assets (c.0.8% at 30 June 2021). 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 against the industry. The bank has traditionally reported stronger asset quality metrics than most banks, with the NPL ratio trending well below 5.0% through the cycle until recently. The NPL ratio was 6.6% at December 2020, edging higher to 11.0% at June 2021, marginally below industry average but still outperforming the peers. The spike in NPL ratio and credit losses at c.2.5% have seen a moderation in the risk position strength while we also note concentration towards vulnerable sectors as a potential for further downgrade in risk position. We expect the gross NPL ratio to stabilize at around 10%-12% (net NPL ratio at around 4%-5%) over the next 18 months, while cost of risk is likely to moderate to 2.0%. VCB’s loan book is concentrated to vulnerable sectors (manufacturing, trade, construction and real estate account for c.78% of the book as at June 2021), driving the majority of the current NPLs. However, the long-term nature of customer relationships enhances credit risk profiling mitigating the downside. 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 positive ratings factor, balancing a fairly stable funding structure for a tier 3 bank and robust liquidity that is better than lower tier peers. The funding composition is largely term deposits (70%), with 60% of total deposits coming from retail consumers and 40% from corporates. Positively, term deposits have proven to be sticky, supporting the bank’s GCR stable funding ratio (customer deposits plus long-term borrowings/total funding needs) >100% as of 30 June 2021. Liquidity is supported by the very short-term loan book that has c.45% of exposures maturing within 12 months. The bank also maintains a good regulatory liquidity coverage ratio of 35% as at 30 June 2021 vs the required minimum of 20%.
The stable outlook reflects our expectations of economic recovery as a result of easing operating environment pressures and moderation in asset quality metrics in the next 12-18 months. We also expect the competitive position, funding base, and liquidity of the bank to remain stable.
A downgrade could be caused by sustained higher NPLs and credit losses at 12% and 4%, respectively, and lower than 15% GCR capital ratio. The upside to the ratings could be supported by increased business diversification, improvement in asset quality, and stronger capitalisation.
|Primary analyst||Dennis Kariuki||Senior Financial Institutions Analyst|
|Nairobi, KE||DennisK@GCRratings.com||+27 11 784 1771|
|Committee chair||Matthew Pirnie||Group Head of Ratings|
|Johannesburg, ZA||MatthewP@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 2021|
|GCR Financial Institutions Sector Risk Score, June 2021|
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||0.75|
|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 2020;
- Unaudited half year results for 2021;
- Latest internal and/or external audit report to management;
- A breakdown of facilities available and related counterparties; and
- Industry comparative data.