Nairobi, 27 May 2021 – GCR Ratings (“GCR”) has upgraded the Kenyan long and short-term issuer ratings assigned to Kenya National Police Deposit Taking SACCO Society Limited to BBB+(KE)/A2(KE), from BBB(KE)/A3(KE) respectively, with a Positive outlook.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook / Watch|
|Kenya National Police Deposit Taking SACCO Society Limited||Issuer Long Term||National||BBB+(KE)||Positive Outlook|
|Issuer Short Term||National||A2(KE)||–|
The ratings on Kenya National Police Deposit Taking SACCO Society Limited (” Kenya National Police DT SACCO”, “the SACCO”) reflect its favourable asset quality relative to financial sector peers, good capital and leverage and sound funding and liquidity, counterbalanced by its limited competitive position in the context of the broader banking/financial institutions sector.
The Kenyan Banking sector comprises of Commercial Banks, SACCOs and Micro Finance Institutions (MFIs). In terms of asset values, commercial banks have combined assets of over KES 5trillion, SACCOs over KES 600billion and MFIs approximately KES 75billion. The SACCO sector is dominated by a few large SACCOs; out of 175 deposit taking SACCOs, the largest 20 control about 60% of the deposits. Even though Kenya National Police DT SACCO is the third largest deposit-taking co-operative society with over 60,000 members and assets of KES 39billion, the competitive score is a negative factor due to the sheer size of the commercial banking sector.
With a GCR Leverage ratio of 31.73% for FY20, (FY19: 29.51%), the SACCO’s strong capital position is a key ratings strength. GCR expects the strong capital position to persist into the long term, supported by a sustainable dividend pay-out ratio and strong earnings. The society’s dividend policy dictates that the dividends declared and approved by the board are the net surplus after retention of KES 1billion or 20% of the net earnings and fulfilment of the capital adequacy requirements. The current core capital to total assets ratio at 32.0% is 22% above the regulatory requirement of 10.0%, the institutional assets to capital ratio at 23.9% is 15.9% higher than the 8.0% regulatory requirement and the core capital to deposits ratio at 49.3% is 41.3% above the 8.0% requirement.
Kenya National Police DT SACCO’s risk position is a positive ratings factor. The reported gross NPLs (FY20: 0.8%) tracked below the industry average of 6.15%. 99.0% of the Kenya National Police DT SACCO members are mostly police officers and salaried civil servants and we view the member base as possessing asset quality supportive characteristics such as, stable government-based salaries and deduction at source. In addition to this, use of guarantors and collateral has ensured that the SACCO has consistently reported low NPLs between 0.3% and 1.7% over the past 5 years. The lending book is diversified and the top 20 NPLs form 0.19% of the total loan book. This risk profile could change should the SACCO increase exposure to SMEs which are viewed to be a more vulnerable sector. While an increase in NPLs were noted in FY20 (due to the pandemic and other operational environmental factors), we expect NPLs to trend below 1.5% over the next 12-18 months.
The funding and liquidity position of the entity reflects the very stable funding structure, with non-withdrawable deposits accounting for c.90% of total customer deposits at FY20 (KES 21.3 billion. Kenya National Police DT SACCO non-withdrawable member deposits cannot be withdrawn unless a 60 days’ notice is issued to the society. Share capital can only be transferred to another member at a minimum price of 80% of the share value and the SACCO provides an over-the-counter market for this. The deposit book is also very diversified, with the top 20 depositors accounting for c.0.71% of total deposits.
Negatively, SACCOs have a higher cost of funding because of business model and Kenya National Police DT SACCO’s cost of funds of 9.3% in FY20 (FY19: 9.7%)) is materially higher than that of commercial banks which average c.2.0%. However, we consider liquidity to be more than adequate, with the regulatory liquidity ratio at 63.0% at the end of FY20 (FY19:60%) which provides a buffer to the regulatory requirement of 15%.
The positive outlook is premised on GCR’s expectation of sustained capital strength (GCR leverage ratio above 25%), driven mainly by strong earnings and a conservative dividend policy. The risk position is expected to remain better than peers, albeit elevated compared to past levels because of the effects of the pandemic on the economic environment. The liquidity position is expected to remain adequate and the funding stable.
An upgrade could arise if the financial profile remains sound over the next 12 months, including capital adequacy and risk positions remaining very strong versus sector peers and funding stability/ liquidity continuing to be strong. We could lower the ratings if asset quality or funding stability deteriorate.
|Primary analyst||Eleanor Kigen||Senior Analyst|
|Nairobi, KE||eleanork@GCRratings.com||+254 732 188 671|
|Secondary analyst||Vinay Nagar||Senior Financial Institutions Analyst|
|Johannesburg, ZA||vinay@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, March 2021|
|GCR Financial Institutions Sector Risk Score, February 2021|
Kenya National Police Deposit Taking SACCO Society Limited
|Rating class||Review||Rating scale||Rating class||Outlook||Date|
|Issuer Long Term||Initial||National||BB+(KE)||Stable||November 2016|
|Issuer Short Term||Initial||National||B(KE)||Stable||November 2016|
Risk Score Summary
|Country risk score||4.00|
|Sector risk score||2.50|
|Management and governance||0.00|
|Capital and Leverage||3.00|
|Funding structure and Liquidity||0.50|
|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.|
|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.|
|Issuer||The party indebted or the person making repayments for its borrowings.|
|Leverage||With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.|
|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.|
|Rating Outlook||See GCR Rating Scales, Symbols and Definitions.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Short Term Rating||See GCR Rating Scales, Symbols and Definitions.|
|Short Term||Current; ordinarily less than one year.|
SALIENT POINTS OF ACCORDED RATINGS
GCR affirms that a.) no part of the ratings were 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; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The credit rating has been disclosed to Kenya National Police DT SACCO Society Limited. The ratings above were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating.
Kenya National Police DT SACCO Society Limited participated in the rating process via telephonic 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 Kenya National Police DT SACCO Society Limited and other reliable third parties to accord the credit rating included:
- Audited financial results of Kenya National Police DT SACCO Society Limited as at 31 December 2020;
- Management letter from auditors December 2020;
- SASRA Industry Reports;
- Regulatory returns filed by Kenya National Police DT SACCO.