Announcements Financial Institutions Rating Alerts

GCR upgrades the ratings of I&M Bank (Rwanda) Plc to A(RW)/A1(RW) as capital position improves and operating environment pressure eases, Stable Outlook

Rating Action

Johannesburg, 23 August 2021 – GCR Ratings (‘GCR’) has upgraded I&M Bank (Rwanda) Plc’s national scale long and short-term issuer ratings to A(RW)/A1(RW), from A-(RW)/A2(RW), respectively. The outlook is Stable.

Rated Entity / Issue Rating class Rating scale Rating Outlook / Watch
I&M Bank (Rwanda) Plc Long Term Issuer National A(RW) Stable Outlook
Short Term Issuer National A1(RW)

Rating Rationale

The ratings on I&M Bank (Rwanda) Plc has been upgraded on the back of strengthened capital position supported by a rights issue that raised Frw 8bn in FY20, resilient asset quality amidst a challenging operating environment, sustained sound funding structure, and robust liquidity.

I&M (Rwanda)’s competitive position is supported by its sound market position as a top tier bank that operates in a somewhat overbanked and increasingly competitive sector. At FY20, I&M (Rwanda) had approximately 11.2% deposit and 10.7% loan market shares in Rwanda, with particular market strengths in the corporate and high net wealth individuals space in the country. Business diversification is considered to be fairly strong, given the small size and wealth levels of the economy, with corporate, SME and retail divisions accounting for 55%, 16% and 29% of loans and advances at Q121. The bank is, on the other hand, geographically concentrated and does not appear to benefit from the same group synergies as top tier regional peers. The bank has achieved decent operating revenue growth over the past 4-5 years, averaging 10%. We expect revenues to remain stable in the next 12-18 months given the recovery in lending and easing of operating environment pressures. Whilst revenue stability has been good, it is somewhat supported by market sensitive income (c.12% of total revenues in FY20).

The bank’s GCR total capital to risk-weighted assets ratio was 15.9% at 1Q21, which is at the lower end of the intermediate assessment. Positively, we have improved the score given the capital injection from a rights issue in August 2020 which raised Frw 8bn. The capital injection boosted the bank’s GCR total capital to risk-weighted assets ratio by 145bps to 16.1% in FY20 from 14.6% in FY19. Over the next two years, we anticipate that the bank’s GCR total capital to risk-weighted assets ratio will remain stable within 15%-18% supported by internal capital generation, which will outpace growth in risk-weighted asset. We expect core earnings to increase from 1.0% of adjusted assets to around 1.2% over the next 12-18 months, reflecting improved growth and moderating cost of risk.

The risk position of the bank is a positive ratings factor, reflecting the low credit losses achieved by the bank over 5 years (excluding FY20) of around 0.5%. FY20 saw credit losses spike to 2.8% due to Covid-19 related impairments but we anticipate this to decline to 1.5% over the next 12-18 months. We consider loan loss reserve coverage to be appropriate, covering 3.8% of the total loan book and 99% of non-performing loans at FY20. We expect moderate recovery in FY21 due to easing pressure from the operating environment, with cost of risk forecast to settle at 2% in a severe stress scenario. Positively, the bank is not as exposed as many domestic banking peers to vulnerable sectors. As a result, we expect the bank to continue to outperform the East African banking peer group, in terms of asset quality. Furthermore, foreign currency (‘FX’) lending is relatively modest in comparison to regional peers, with USD lending accounting for around 24% of total loans at FY20. The bank also runs a modest short net-open position of less than 10% of shareholder funds, which could translate into modest balance sheet gains/losses in a USD depreciation/ appreciation event.

Funding and liquidity is considered to be a positive ratings factor for the bank. The funding structure is sound, predominantly made up of behaviourally sticky deposits. At FY20, core deposits accounted for 72% of the total funding base. The bank has reduced reliance on less stable bank deposits with non-core deposits decreasing to 14% of the funding base in FY20 from 19% in FY19. However, the bank does run with some depositor concentrations, with the top 10, 20 and 50 depositors accounting for c.39%, c.47% and c.58% of total deposits, respectively. However, it is worth noting that the largest depositor is common across all top tier banking peers. Liquidity is positive, with liquid assets covering up to 4x wholesale funding and 54% of customer deposits at 1Q21. We also view the liquidity management of the dollar book to be sound, with FX liquid assets covering 42% of total FX liabilities.

I&M Rwanda is ultimately controlled by the I&M Holdings (unrated), a financial institution holding company, which has banking subsidiaries across the East African region. However, I&M Rwanda is not owned by another regulated bank, nor does the group operate as one holistic operating structure as the group’s entities are largely operationally self-sufficient, and there is no cross-default clauses or large direct credit linkages, including no related lending or deposits. Furthermore, there is limited customer overlap between the Rwandan and sister entities. We also believe that the regulator has attempted, where possible, to ensure a disconnect between associate banks operating in the region. Importantly, due to I&M (Rwanda)’s status as a domestic systemically important bank (DSIB) we believe there is an economic basis for the regulator to separate the bank from the group in case of need. As a result, we have somewhat insulated the Rwandan bank from its group operations, although a severe deterioration in the group’s creditworthiness may impact the ratings on the Rwandan bank.

Outlook Statement

The stable outlook reflects the enhanced capital position and outperformance of the bank’s asset quality versus regional peers. Also, the bank has cemented its market position and we expect funding and liquidity to remain stable in the next 12-18 months.

Rating Triggers

We could raise the ratings if the capital levels of the bank improves and asset quality outperforms our expectations and peers, which will improve internal capital generation (post dividends). Over the longer-term, more stable funding sources and greater scale could improve the ratings. We could lower the ratings if capital levels decline below our expectations, or if asset quality is worse than our forecast. Although unexpected, greater reliance on unstable funding sources or weaker liquidity could also lower the ratings. A material deterioration in Group dynamics could also lower the ratings.

Analytical Contacts

Primary analyst Dennis Kariuki Senior Financial Institutions Analyst
Nairobi, KE DennisK@GCRratings.com +27 11 784 1771
Secondary analyst Matthew Pirnie Group Head of Ratings
Johannesburg, ZA MatthewP@GCRratings.com +27 11 784 1771
Committee chair Vinay Nagar Senior Financial Institutions Analyst
Johannesburg, ZA VinayN@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, July 2021
GCR Financial Institutions Sector Risk Score, June 2021

Ratings History

I&M Bank (Rwanda) PLC

Rating class Review Rating scale Rating class Outlook Date
Long Term Issuer Initial National A-(RW) Stable November 2018
Short Term Issuer Initial National A2(RW) n.a November 2018
Long Term Issuer Last National A-(RW) Evolving August 2020
Short Term Issuer Last National A2(RW) n.a August 2020

Risk Score Summary

Rating Components and Factors Risk Scores
Operating environment 7.25
Country risk score 3.50
Sector risk score 3.75
Business profile 0.50
Competitive position 0.50
Management and governance 0.00
Financial profile 0.50
Capital and leverage (1.50)
Risk 1.25
Funding structure and liquidity 0.75
Comparative profile 0.00
Group support 0.00
Peer analysis 0.00
Total Score 8.25

Glossary

Capital The sum of money that is invested to generate proceeds.
Cash Funds that can be readily spent or used to meet current obligations.
Cash Flow The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.
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.
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.
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.

Salient Points 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.

The credit rating has been disclosed to I&M Bank (Rwanda) PLC. The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating.

I&M Bank (Rwanda) PLC participated in the rating process via virtual 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 I&M Bank (Rwanda) PLC and other reliable third parties to accord the credit rating included:

  • Audited financial results as at 31 December 2020;
  • Unaudited financial results as at 31 March 2021;
  • Banking sector information;
  • A breakdown of facilities available and related counterparties;
  • Industry comparative data.
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