Johannesburg, 28 Sep 2015 – Global Credit Ratings has today upgraded the national scale long term rating assigned to Eastern and Southern African Trade and Development Bank to AAA(KE) and affirmed the national scale short term rating of A1+(KE); with the outlook accorded as Stable. Furthermore, Global Credit Ratings has affirmed the international scale rating assigned to Eastern and Southern African Trade and Development Bank of BB+; with the outlook accorded as Stable. The rating(s) are valid until September 2016.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating(s) to Eastern and Southern African Trade and Development Bank (“PTA Bank” and/or “the Bank”) based on the following key criteria:
The ratings of PTA Bank reflect its favourable strategic position on the African continent, derived from its development mandate and broad equity participation (comprising three institutional investors, 18 African governments, and the governments of China and Belarus from outside the region). Given the shareholder diversity and the provisions of the Bank’s Charter (eg, limiting any single shareholding to 15%), the level of sovereign interference risk is considered to be relatively low. The Bank’s unique trade and development expertise and experienced management team underpins its leverage with governments in the region. The upgrade of PTA Bank’s national scale long term rating reflects the Bank’s improved asset quality, strong liquidity and earnings metrics, and ability to attract funding.
Continued strong asset growth (CAGR of 41% over the last 5 years) in line with its mandate saw the total capital to assets ratio easing to a review period low of 17.5%. In this respect, the Bank has embarked on a membership recruitment drive, with the Board of Governors (“BOG”) also approving an increase in the Bank’s authorised capital in 2012 from USD2bn to USD3bn to facilitate the entry of Class B shareholders. Capital and reserves grew by 30.4% to USD621.9m at FYE14 (FYE13: 38.6%), supported by paid up capital receipts (USD68m) from new and existing shareholders and earnings retention (USD77m).
Risk-adjusted capitalisation remains adequate, with the Bank reporting a capital adequacy ratio of 33.7% at FYE14 (FYE13: 34.7%), calculated in line with Basel II requirements (internal minimum 30%). Financial flexibility is further bolstered by the Bank’s access to substantial callable capital (USD1.1bn), which acts as a guarantee of the Bank’s borrowings. The callable capital provides an additional buffer and demonstrates shareholder commitment in the event of financial stress (albeit cognisance is taken of possible delays in collecting capital from some member countries).
Impaired loans declined by 15.3% to USD78.3m in F14, supported by write-offs and loan restructuring. Accordingly, the Bank’s gross non-performing loan (“NPL”) ratio declined to 3% at FYE14 from 4.4% at FYE13. Arrears coverage (by specific provisions) increased to 72.9% at FYE14 (FYE13: 65.8%). Consequently, net NPLs remained low as a percentage of capital at 3.4% (FYE13: 6.6%). Although NPLs are generally well secured, realising security throughout the region has proven to be a challenging and lengthy process.
Net income increased by 15.6% to USD77m in F14 (F13: 30.1% increase). Profitability indicators softened somewhat, with the F14 ROaE and ROaA decreasing to 14.1% (F13: 15.4%) and 2.6% (F13: 2.9%) respectively. Given the fact that borrowings are mainly utilised to finance loans of comparable maturities, PTA Bank exhibited low liquidity risk, with cumulative liquidity buffers maintained across all maturity buckets at FYE14.
PTA Bank’s charter and well-diversified shareholding ameliorates sovereign interference risk. The majority of cash and liquid assets are US Dollar denominated and placed with reputable counterparties with high international ratings. In addition, asset/liability maturities are generally matched. Due to the diversity of the funding base, the international rating has not been constrained by the country ceilings of member countries.
A positive earnings trend, diversification of the loan portfolio, further strengthening of the equity base and shareholding profile, and evidence of the Bank’s capacity to increase loans while maintaining adequate asset quality, could lead to upward ratings migration. Conversely, a significant deterioration in asset quality due to deteriorating economic conditions across member countries, as well as a further rise in loan concentration risk, could exert downward pressure on the ratings.
|NATIONAL SCALE RATINGS HISTORY||INTERNATIONAL SCALE RATING HISTORY|
|Initial rating (November 2004)||Initial rating (November 2004)|
|Long term: AA(KE); Short term: A1(KE)||Long term: BB|
|Outlook: Stable||Outlook: Stable|
|Last rating (September 2014)||Last rating (September 2014)|
|Long term: AA+(KE); Short term: A1+(KE)||Long term: BB+|
|Outlook: Stable||Outlook: Stable|
Sector Head: Financial Institution Ratings
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)
Kenya Bank Statistical Bulletin (June 2015)
PTA Bank rating reports (2004-14)
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.
Eastern and Southern African Trade and 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 Eastern and Southern African Trade and Development Bank with no contestation of the rating.
- Audited financial results of the Bank as at 31 December 2014 (plus four years of comparative figures)
- Unaudited interim results of the Bank as at 30 June 2015
- Budgeted financial statements for 2015
- Latest internal and/or external audit report to management
- Reserving methodologies
- A breakdown of facilities available and related counterparties
- Corporate governance and enterprise risk framework
- Industry comparative and regulatory framework
The ratings above were solicited by, or on behalf of, Eastern and Southern African Trade and 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
|Arrears||An overdue debt, liability or obligation. An account is said to be ‘in arrears’ if one or more payments have been missed in transactions where regular payments are contractually required.|
|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.|
|Basel II||Basel Committee regulations, which attempt to integrate Basel capital standards with national regulations, by setting the minimum capital requirements of financial institutions with the goal of ensuring institutional liquidity.|
|CAGR||The compound annual growth rate is the year-on-year percentage growth rate of an investment over a given period of time.|
|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.|
|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.|
|Institutional Investors||Financial institutions such as pension funds, asset managers and insurance companies, which invest large amounts in financial markets on behalf of their clients.|
|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.|
|Liquid Assets||Assets, generally of a short term, that can be converted into cash.|
|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.|
|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.|
|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.|
|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.|
|Write-off||The total reduction in the value of an asset.|
For a detailed glossary of terms utilised in this announcement please click here