Johannesburg, 31 October 2016 — Global Credit Ratings has today accorded national scale ratings to African Banking Corporation Limited of BBB(KE) and A3(KE) in the long term and short term respectively; with the outlook accorded as Negative.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to African Banking Corporation Limited (“ABC” or “the bank”) to reflect its niche position, strategies towards enhancing the bank’s market position, and capitalisation initiatives. The enhanced risk management process, decreasing liquidity buffers, moderate earnings profile (relative to peers) and significant deterioration in asset quality (evident through the industry) were also factored into the ratings.
The bank’s regulatory capital grew by 2.3% to KES3.0bn at FYE15 (FYE14: 57.2%), supported mainly by organic growth. Meanwhile, risk weighted assets grew by 7.1% (FYE14: 37.5%). This resulted in a decline of the bank’s capital adequacy ratio (“CAR”) to 16.5% at FYE15 (FYE14: 17.2%) but remained above the prevailing regulatory minimum of 14.5% at end-2015. As part of its capitalisation initiatives, the shareholders in 2015 approved a capital injection of KES1bn via private placement expected to be concluded by end-2016, which will strengthen the capital buffer and support future growth.
Asset quality came under pressure in F15, on account of slowing economic activity, exacerbated by rising interest rates, delayed government payments and an unfavourable business environment. To this end, the bank’s gross non-performing loan (“NPL”) ratio escalated to 14.0% at FYE15 (FYE14: 5.9%). That said, the bank’s gross NPL ratio showed slight improvement in 3Q F16 (mainly through recoveries and write-offs). ABC’s specific provision coverage decreased to 11.7% at FYE15 (FYE14: 34.4%). The remaining exposure was more than fully covered by the fair value of collateral held. Although credit mitigation is supported by holding collateral, cumbersome legal processes mean that the realisation of collateral may be a problematic and a lengthy process. Although the ratio of NPLs net of provisions to the bank’s core capital is a significantly higher 63.6% at FYE15 (FYE14: 18.5%), GCR notes the capital raising initiatives to strengthen the capital cushion.
Pre-tax earnings grew by 15.3% to KES388m in F15, supported by an increase in interest income (due to growth in the loan book), a decline in impairment charges (as a result of lower provisions raised) and a decrease in operating expenditure which was partly offset by a drop in non-interest income. Overall, the bank’s ROaA and ROaE remained largely unchanged at 1.3% and 10.6% in F15 (F14: 1.3% and 10.7%) respectively.
ABC’s key liquidity ratio displayed a continued downward trend in F15. The ratio of liquid and trading assets/short term funding registered at 27.5% at FYE15, down from 34.4% at FYE14. However, the liquidity level met regulatory requirements comfortably (prudential minimum at 20%).
A track record of positive earnings performance (while maintaining credit protection factors), strong asset quality metrics, a further strengthening of capitalisation, appropriate deployment of capital/funding, and a reduction in funding costs (on the back of the retail strategy), could lead to upward ratings migration. The ratings may be downgraded following further asset quality erosion (diminishing ABC’s ability to absorb further losses), inability to complete capital raising initiatives, weakened liquidity metrics, and a challenging operating environment on the back of a weak global outlook.
|NATIONAL SCALE RATINGS HISTORY|
|Initial ratings (September 2010)|
|Long term: BBB(KE); Short term: A3(KE)|
|Last ratings (October 2015)|
|Long term: BBB(KE); Short term: A2(KE)|
|Primary Analyst||Secondary Analyst|
|Kurt Boere||Vimbai Muhwati|
|Credit Analyst||Junior Credit Analyst|
|(011) 784-1771||(011) 784-1771|
|Senior Credit Analyst|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Banks and Other Financial Institutions, updated March 2016
Kenya Operating Environment Overview (May 2016)
Kenya Bank Statistical Bulletin (December 2015)
ABC rating reports (2010-15)
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.
African Banking Corporation Limited participated in the rating process via teleconferences and other written correspondence. The ratings were accorded based on publicly available information and information received from management. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit ratings have been disclosed to African Banking Corporation Limited with no contestation of the rating.
The information used to analyse African Banking Corporation Limited and accord the credit ratings included:
• Audited financial results of the bank as at 31 December 2015 (plus four years of comparative figures)
• Unaudited interim results of the bank as at 30 June 2016
• Budgeted financial statements for 2016
• 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 credit ratings above were solicited by, or on behalf of, the rated client, 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
|Asset||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|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 (ie, being paid back in accordance with their terms) and the likelihood that they will continue to perform.|
|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.|
|Collateral||Asset provided to a creditor as security for a loan.|
|Downgrade||The assignment of a lower credit rating to a company or sovereign borrower’s debt by a credit rating agency. Opposite of upgrade.|
|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.|
|Fair Value||The fair value of a security, an asset or a company is the rational view of its worth. It may be different from cost or market value.|
|Financial Institution||An entity that focuses on dealing with financial transactions, such as investments, loans and deposits.|
|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.|
|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.|
|International Scale Rating LC||International local currency (International LC) ratings measure the likelihood of repayment in the currency of the jurisdiction in which the issuer is domiciled. Therefore, the rating does not take into account the possibility that it will not be able to convert local currency into foreign currency or make transfers between sovereign jurisdictions.|
|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||Not current; ordinarily more than one year.|
|Long-Term Rating||Reflects an issuer’s ability to meet its financial obligations over the following three to five year period, including interest payments and debt redemptions. This encompasses an evaluation of the organisation’s current financial position, as well as how the position may change in the future with regard to meeting longer term financial obligations.|
|National Scale Rating||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.|
|Performing Loan||A loan is said to be performing if the borrower is paying the interest on it on a timely basis.|
|Private Placement||The sale of securities to a small number of institutional investors such as large banks, insurance companies and pension funds. Such issuances do not require a formal prospectus and are often not listed on an exchange.|
|Provision||The amount set aside or deducted from operating income to cover expected or identified loan losses.|
|Regulatory Capital||The total of primary, secondary and tertiary capital.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Risk Management||Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy.|
|Risk Management Process||The systematic application of management policies, procedures and practices to the tasks of risk identification, assessment and measurement, response and action, monitoring and review, and risk reporting.|
|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||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
Global Credit Ratings accords African Banking Corporation Limited a rating of BBB(KE); Outlook Negative