Johannesburg, 24 November 2015 – Global Credit Ratings has upgraded the long term national scale ratings assigned to East African Development Bank to AA+(UG),(KE),(TZ),(RW), with the outlook accorded as Stable, and affirmed the short term national scale ratings of A1+(UG),(KE),(TZ),(RW). Furthermore, Global Credit Ratings has upgraded the foreign currency international scale rating assigned to East African Development Bank to BB+, with the outlook accorded as Stable. The ratings are valid until November 2016.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating(s) to East African Development Bank (“EADB”, “the bank”) based on the following key criteria:
The ratings of EADB reflect its status as a multilateral development bank (“MDB”), its development mandate in East African Community (“EAC”) member countries, the low rating-based capacity but moderately high willingness of members to support, its strong financial profile based on capital, leverage and liquidity, and enhanced asset quality/returns relative to prior periods and MDB peers. EADB is an organ of the EAC (recognised by Treaty), and 86.1% of the bank’s shares are held by EAC member states (Kenya, Uganda, Tanzania and Rwanda). International development finance institutions (“DFIs”) including the African Development Bank (“AfDB”) hold the bulk of the remaining shares. EADB enjoys preferred creditor status in the region. During F13, AfDB raised its shareholding to 11.0%. This has subsequently been diluted to 9.0% by 30 September 2015, as a result of USD32.9m in additional capital paid-in by member states during F14 and 3Q F15. The confidence shown by AfDB, a highly rated MDB, and its provision of capital, technical and funding (USD40m) support underpins the bank’s ratings.
EADB is well capitalised, with a capital/assets ratio of 74.5% at FYE14. Capital and reserves grew by 20.5% to USD219.4m at FYE14, supported by members’ paid up capital receipts (USD20.9m), earnings (USD9.8m) and a USD8.1m property revaluation reserve. Capitalisation should moderate as the bank increases leverage from current low levels (FYE14 debt/equity ratio of 26.6%), but capital buffers are large enough to ensure continued strong metrics. In F15, EADB’s authorised share capital was doubled to USD2.16bn, and paid-in capital currently accounts for 92% of authorised paid up capital. The additional shareholder support commitment derived from callable capital (USD759.3m in FYE14), enhances financial flexibility, albeit cognisance is taken of the possible delays in collecting capital from member states.
Asset quality indicators continued to strengthen, with the gross non-performing loan (“NPL”) ratio falling to 1.4% at FYE14 (FYE13: 1.6%) from 32.0% at FYE10. Impaired loans were 2.8x (FYE14) covered by specific provisions. Loans are 1.5 times collateralised and issued in currencies matching borrowers’ income streams, but potential volatility in member states’ economies could negatively impact borrowers’ repayment abilities as the bank expands lending operations.
F14 pre-tax profit of USD9.8m exceeded F13 levels by 15.8%, reflecting higher market interest rates on liquid assets, lower impairment charges, and contained operating expenses. ROaA remained stable at 3.6% in F14, while ROaE fell by 0.1% to 4.9% on account of higher capital. EADB’s liquid balance sheet underpins its high national short term rating. FYE14 external debt of USD58.3m was 2.6x covered by cash resources.
GCR assessed EADB’s position in regard to transfer and convertibility (and related) risks impacting the international scale rating to be ‘moderately strong’. In this regard, the bank’s charter, diversified shareholding and preferred creditor status ameliorate sovereign interference risk. Furthermore, currency mismatches (modest at FYE14; 4.1% of capital), cover of foreign currency debt by liquid assets in banks with highly-rated parents/shareholders (high at 2.0x at FYE14) and funding diversification, resulted in the international scale rating not being constrained by member countries’ sovereign ceilings.
A significant increase in scale, shareholder capacity, and funding diversification, together with maintenance of strong asset quality, liquidity and capital metrics, may have a positive impact on the ratings. A reduction in asset quality (driven by deteriorating economic/regulatory environments in member states), and/or declining shareholder capacity/willingness to support the bank could trigger a negative rating action.
|NATIONAL SCALE RATINGS HISTORY||INTERNATIONAL SCALE RATING HISTORY|
|Initial rating (November 2012)||Initial rating (November 2012)|
|Long-term: AA(UG),(KE),(TZ),(RW); Short-term: A1+(UG),(KE),(TZ),(RW)||Long-term: BB-|
|Outlook: Stable||Outlook: Stable|
|Last rating (November 2014)||Last rating (November 2014)|
|Long-term: AA(UG),(KE),(TZ),(RW); Short-term: A1+(UG),(KE),(TZ),(RW)||Long-term: BB|
|Outlook: Stable||Outlook: Stable|
|Primary Analyst||Committee Chairperson|
|Omega Collocott||Jennifer Mwerenga|
|Sector Head: Financial Institution Ratings||Senior Credit Analyst|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2015
Global Criteria for Rating Multilateral Development Banks, September 2015
EADB rating reports (2012-14)
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.
East African Development Bank participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit rating/s has been disclosed to East African Development Bank with no contestation of the rating.
The information received from East African Development Bank and other reliable third parties to accord the credit rating included:
- Audited annual financial statements of the bank at 31 December 2014 (plus four years of comparative figures)
- Budgeted financial statements for 2015
- Latest internal and/or external audit report to management
- Corporate governance and enterprise risk framework
- Capital management policy and reserving methodologies
- A breakdown of facilities available and related counterparties
- Industry comparative data and regulatory framework
The ratings above were solicited by, or on behalf of, East African Development Bank, 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
|African Development Bank||A development finance institution, headquartered in Tunis, which aims to reduce poverty/promote social development among its members.|
|Asset||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|Asset Quality||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 (i.e. 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.|
|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.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Collateral||Asset provided to a creditor as security for a loan.|
|Corporate Governance||Corporate governance broadly 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||An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.|
|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.|
|Creditworthiness||An assessment of a debtor’s ability to meet debt 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.|
|Default||Failure to meet the payment obligation of either interest or principal on a debt or bond. Technically, a borrower does not default, the initiative comes from the lender who declares that the borrower is in default.|
|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.|
|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.|
|Impairment||Reduction in the value of an asset because the asset is no longer expected to generate the same benefits, as determined by the company through periodic assessments.|
|Income Statement||A summary of all the expenditure and income of a company over a set period.|
|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||ISRs relate to either foreign currency or local currency commitments, assessing the capacity of an issuer to meet these commitments using a globally applicable (and therefore internationally comparable) scale.|
|Leverage||With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.|
|Liabilities||All financial claims, debts or potential losses incurred by an individual or an organisation.|
|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|
|Long term||Not current; ordinarily more than one year.|
|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||The national scale 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.|
|Non-Performing Loan||When a borrower is overdue, typically 90+ days in arrears or as defined by the lender, or in the transaction documents.|
|Off Balance Sheet||Off balance sheet items are assets or liabilities that are not shown on a company’s balance sheet. They are usually referred to in the notes to a company’s accounts.|
|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.|
|Principal||The total amount borrowed or lent, e.g. the face value of a bond, excluding interest.|
|Provision||The amount set aside or deducted from operating income to cover expected or identified loan losses.|
|Revaluation||Formal upward or downward adjustment to assets such as property or plant and equipment.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Securities||Various instruments used in the capital market to raise funds.|
|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||A short term rating is 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