GCR release the Ratings on four Kenyan Financial Institutions under its new criteria
Rating Action
Johannesburg, 27th September 2019 – GCR Ratings (“GCR”) has reviewed the ratings on four Kenyan financial institutions under the recently released Criteria for Rating Financial Institutions, May 2019.
On May 22, 2019 GCR announced that it had released new criteria for all banks and bank-like entities. This methodology is titled Criteria for Rating Financial Institutions. As a result, all affected ratings were placed ‘Under Criteria Observation’.
Subsequently, GCR have finalised the first wave of Kenyan Financial Institution reviews under this new methodology. As a result, the ratings below have been removed from ‘Under Criteria Observation’ and the ratings revised in line with the new methodology.
The following financial institutions were included in this review:
- Equity Group Holdings Limited’s long and short-term unsolicited Kenyan national scale ratings have been affirmed at AA-(KE)/A1+(KE) respectively, with the outlook accorded as stable.
- Kenya Police Sacco Society Limited’s long and short-term Kenyan national scale ratings have been revised to BBB(KE)/ A3(KE) from BB+(KE)/B(KE) respectively, with the outlook accorded as stable.
- Stima DT Sacco Society Limited’s long and short-term Kenyan national scale ratings have been revised to BB(KE)/B(KE) from BB+(KE)/B(KE) respectively, with the outlook accorded as stable.
- Victoria Commercial Bank Limited’s long and short-term Kenyan national scale ratings have been affirmed at BBB+(KE)/A2(KE), and the outlook accorded as stable.
Rating Summary
The below ratings all factor in the following core elements of Kenyan Country and Financial Institutions Sector risk into their assessments. However, depending on the geographic exposures of the banks, the blending of country and sector risk may differ for each rated entity (see the Risk Score Summary below).
Republic of Kenya, Country Risk Score: ‘4.5’
Kenya’s country risk score of ‘4.5’ balances its position as a regional hub, the low wealth economy, with improving institutional effectiveness, high economic growth and growing fiscal pressures at the government level. GCR expect GDP per capita to range around $2,000 and GDP growth of above 5.5% for the next 12-18 months. The institutional score is supported by the vitality of the private sector, whereas politics and corruption weigh the score down. GCR believe the Kenyan sovereign’s fiscal position will continue to deteriorate over the next 12-18 months, as spending increases are not matched by revenues.
Kenyan financial institutions sector risk score: ‘3.5’
The Kenyan financial institutions sector risk score of ‘3.5’ balances the good economic growth and diversification with an increasingly strained government fiscal position and weak sector-wide asset quality, with non-performing loans of around 12% at Dec 31st, 2018. Positively, the foreign currency exposures (around 20-25%) are moderate for the region. We also consider the sector to be somewhat overbanked and strongly competitive. Regulation is broadly in line with the regional average, however, the interest rate cap which restrains profitability and moderate credit extension is not considered positively. We consider the funding for the top end of the market to be stable, dominated by retail and corporate deposits. However, institutional investor concentrations permeate elements of the second and third tiers of the sector. We have reduced the sector risk score for non-bank financial institutions to ‘1.5’ to reflect the less stringent prudential regulation and oversight, alongside a lack of access to the Central Bank window.
The ratings on the four reviewed financial institutions also reflect the following:
Equity Group Holdings Plc (unsolicited)
| Rated Entity / Issue | Rating class | Rating scale | Rating | Outlook / Watch |
| Equity Group Holdings Plc | Issuer Long Term | National | AA-(KE) | Stable Outlook |
| Issuer Short Term | National | A1+(KE) | – |
Rating Rationale
The unsolicited ratings on Equity Group Holdings Plc (‘Equity Group’, ‘the Group’) reflect the group’s strong competitive position, adequate capital position, slightly better than average risk position, and solid funding and liquidity.
Nairobi based- Equity Group Holdings Plc is the non-operating holding company sitting atop the Equity Group, one of the largest and most diversified financial service providers in the East and Central African region. At FY18, the group operated banking franchises across six markets in Kenya (contributing 75.2% of loans), Rwanda (5.1%), Tanzania (4.9%), Uganda (6.5%), South Sudan (0.0%) and the Democratic Republic of Congo (8.3%). Going forward, we expect the geographic diversification outside Kenya to increase as the group is in the process of buying four banks in Mozambique, Zambia, Tanzania, Rwanda and the DRC. The group also operates four non-bank entities, predominantly in Kenya, that provide around 2% of PBT at FY18. Within its core market, of Kenya, the bank is a tier one institution with approximately a 10% deposit market share. The revenue stability of the Group has been good over the past four years, consistently growing despite the impact of the interest rate caps, in part due to the high contribution of non-interest income (approximately 39% of operating revenues at FY18).
With a GCR capital ratio of around 18% at FY18, we consider the capitalisation of the group to be at the lower end of the intermediate range. However, our assessment is supported by robust internal capital generation (averaging c.25% over the past three years). We have factored into the ratings a forecasted return on assets of around 2.5% to 3% over the next couple of years, balancing revenue growth of around 3%-5%, a cost to income of around 55%, stable interest margins and a cost of risk between 1% to 1.5%. This represents a slight deterioration from the Group’s existing financial performance, reflecting expected weaker macro-economic trends and the impact of buying and merging the new banks.
The risk position of the group is a slightly positive rating factor. The group has achieved a cost of risk below 1% for the past two years, which compares well to the market average, despite non-performing loans broadly being in line with top tier peers. We also factor in the positive loan book diversification both geographically and single name, due to the focus on SME and Retail lending. Around 26% of the loan book is extended in foreign currency (“FX”), which introduces some additional risk in a USD appreciation cycle. However, the degree of FX lending is in line with regional peers and the group operates a modest net open position.
The funding structure of the group is stable, with core customer deposits contributing around 74% of the total liability base at FY18. Deposits are split somewhat evenly between retail and corporate. However, they are originated at a price advantage versus peers, which demonstrates the strength of the group’s franchise and distribution capabilities. Liquidity is considered to be strong, with broad liquid assets covering 4x wholesale funding or 50% of total customer deposits.
We have factored in some structural subordination into the ratings, reflecting the non-operating holding company status of the rated entity. Specifically, this addresses the risk that the entity is reliant on the upstreaming of dividends from regulated entities to repay its obligations.
Outlook Statement
The outlook is stable. We expect the group’s GCR capital ratio to remain between the 17-18% range over the next 12-18 months, supported by strong internal capital generation derived from slowly growing but robust earnings. We factor in a slight erosion in loan book quality, due to the merger and macro risks. Funding is expected to remain stable and liquidity robust.
Rating Triggers
A downgrade could arise from a weakening in the capital position, as a result of weakening earnings, or a more aggressive dividend policy. Further, a material deterioration in the asset quality could bring the ratings down. We don’t expect any positive movement in the national scale ratings over the outlook horizon.
Kenya Police Sacco Society Limited
| Rated Entity / Issue | Rating class | Rating scale | Rating | Outlook / Watch |
| Kenya Police Sacco Society Limited | Issuer Long Term | National | BBB(KE) | Stable Outlook |
| Issuer Short Term | National | A3(KE) | – |
Rating Rationale
The ratings on Kenya Police Sacco Society Limited (‘Kenya Police Sacco’) reflect a limited competitive position, strong capital position, solid risk position, and adequate funding and liquidity.
Kenya Police Sacco is a non-bank financial institution operating exclusively in Kenya, with the national police service and their direct families. As a result of this focus, the business line, geographic diversification and market share of the entity is all inherently weaker than wider rated financial sector peers. However, at FY 18, Kenya Police Sacco was the third biggest deposit-taking Sacco in Kenya, with a 10.1% deposit market share. Therefore, we consider its business stability and competitive position versus deposit-taking Sacco’s in Kenya to be good. Furthermore, we believe that the role and status of the entity has inherently garnered strong customer loyalty and helped maintain a good history of revenue stability.
The Sacco’s strong capital position is a key ratings strength. With a GCR Leverage ratio of 22.2% for FY18, the capital position is supported by strong internal capital generation (as a result of strong earnings, shown by a higher than market Return on Assets of 5.8% for FY18) and a materially lower than peers dividend pay-out ratio (c. 7.9% for FY18, immediate peers in 30% to 50% range). GCR expects the strong capital position to persist into the long term, as supported by a sustainable dividend pay-out ratio.
Kenya Police Sacco’s risk position is in line with deposit-taking Sacco peers, but better than the wider financial institutions sector. This is supported in part by the Sacco model, which includes salary deductions, collateral and suretyship within its underwriting process, no foreign currency lending and small lending concentrations. As a result, credit losses and non-performing loans for FY18 were 0.06% and 1.2% respectively, in line with historical numbers, and our expectations going forward. Conversely, industry and product diversification in the loan book is inherently low.
The funding and liquidity position of the entity reflects the very stable funding structure, with ‘non-withdrawable’ deposits (member deposits than can only be withdrawn if loans are fully paid down and the customer is leaving the Sacco) accounting for over 80% of total customer deposits at FY 18. We also consider the liquidity to be adequate, with a GCR Liquid Assets covering c. 77% of withdrawable customer deposits and 7% of total deposits at FY 18.
Outlook Statement
The outlook is stable. We expect the capital position to remain strong at a level above 20%, driven mainly by strong earnings and a more conservative than peers dividend policy. The risk position is expected to remain in line with direct peers, but better than the sector with credit losses between 0.5% – 0.8%. The liquidity position is expected to remain adequate, for the structure of funding.
Rating Triggers
A downgrade could arise from a weakening in the capital position, as a result of weakening earnings, or a more aggressive dividend policy. Further, a material deterioration in the risk or liquidity position, could also result in a downgrade. We consider there to be limited upward ratings potential over the ratings horizon.
Stima DT Sacco Society Limited
| Rated Entity / Issue | Rating class | Rating scale | Rating | Outlook / Watch |
| Stima DT Sacco Society Limited | Issuer Long Term | National | BB(KE) | Stable Outlook |
| Issuer Short Term | National | B(KE) | – |
Rating Rationale
The ratings on Stima DT Sacco Society Limited (‘Stima Sacco’) reflect a limited competitive position, intermediate capital position, good risk position, and adequate funding and liquidity.
Stima Sacco is a non-bank financial institution operating exclusively in Kenya, largely providing secondary financial services to Kenyans working within the domestic energy sector. As a result of this focus, the business line, geographic diversification and market share of the entity is all inherently weaker than wider rated financial sector peers. However, at FY18 the entity was the second biggest deposit-taking Sacco in Kenya by deposits, with a 13.3% market share. Therefore, we consider its business stability and competitive position versus other’ deposit-taking Sacco’s in Kenya to be relatively good. Furthermore, we believe that the role and status of the entity has inherently garnered strong customer loyalty and helped maintain a good history of revenue stability.
Looking back over the past few years, the Sacco has experienced some management and governance difficulties, which have had an adverse impact on the Sacco. Positively, the management team are now stable and the transparency of the entity is considered to be adequate.
The Sacco’s capital position is considered to be intermediate. With a GCR Leverage ratio of 7.3% for FY18, the capital position is driven by solid internal capital generation (as a result of good earnings, as shown by Return on Assets of 2.6% for FY18) but counter-acted by an aggressive dividend policy (pay-out ratio c. 29.9% for FY18, immediate peers in 30% to 50% range, with one outlier close to 8%). GCR expects the capital position to improve closer to a GCR Leverage of 10% over the next 2 – 3 years, owing to efforts to educate members so a less aggressive dividend pay-out ratio can be adopted.
Stima Sacco’s risk position is broadly in line with deposit-taking Sacco peers, but better than the wider financial sector. This is supported in part by the Sacco model, which includes salary deductions, collateral and suretyship within its underwriting process, no foreign currency lending and small lending concentrations. Credit losses and non-performing loans (NPLs) for FY18 were 0.4% and 5.5% respectively, with gross non-performing loans recovering slightly after the FY17 spike to 8.4% (from 1.7% in FY16) caused by weaker underwriting standards and control lapses in 2016. Positively, we believe that the underwriting standards have improved and we therefore expect NPLs to decrease to between 2.5% – 3.5% in the next 2 – 3 years through a combination of recoveries and write-offs. Credit losses are expected to remain at current levels.
The funding and liquidity position of the entity reflects the very stable funding structure, with ‘non-withdrawable’ deposits (member deposits than can only be withdrawn if loans are fully paid down and the customer is leaving the Sacco) accounting for over 75% of total customer deposits at FY 18. The cost of funding (6.35% for FY18) is however higher than rated FI peers. We also consider the liquidity to be adequate, with a GCR Liquid Assets covering c. 76% of withdrawable customer deposits and 18% of total deposits at FY 18.
Outlook Statement
The outlook is stable. We expect the capital position to improve to a level close to 10% in the next 2 – 3 years, enabled mainly by solid earnings and our expectation of a more conservative dividend policy. The risk position is expected to head to levels more in line with rated peers, and remain better than the sector with credit losses between 0.5% – 0.8% and NPLs of 2.5% – 3.5% over the next 2 – 3 years. The liquidity position is expected to remain adequate, for the structure of funding.
Rating Triggers
A downgrade could arise from the failure to improve the capital position through an increased level of profit retention, and further deterioration or failure to improve asset quality closer to historical levels. We consider there to be limited upward ratings potential over the ratings horizon.
Victoria Commercial Bank Limited
| Rated Entity / Issue | Rating class | Rating scale | Rating | Outlook / Watch |
| Victoria Commercial Bank Limited | Issuer Long Term | National | BBB+(KE) | Stable Outlook |
| Issuer Short Term | National | A2(KE) | – |
Rating Rationale
The Kenyan national scale ratings on Victoria Commercial Bank Limited (‘VCB,) reflect the bank’s strength as a niche bank, which is relatively small, but with a solid and stable business model and clientele, strong risk position with the low credit losses in the market, adequate capitalisation and a stable funding structure supported by adequate liquidity.
VCB is a tier 3 bank operating solely in Kenya, with a market share of around 0.8%. The bank provides a range of products mainly targeting the small and medium sized enterprises (“SME”) sector in Kenya. The bank offers relationship-based niche private banking services, focusing on corporate and high net worth clients. The bank’s niche market is stable as has been demonstrated over the years and it is likely to remain stable in the future.
Capitalisation is considered to be adequate, with the GCR capital ratio expected to be in the 20%-21% range in the next 24 months supported by a stable flow of retained earnings. The bank’s leverage position is good with a GCR leverage ratio of 18% while reserving is adequate. The earnings track-record has been stable for a number of years. However, the bank is not as profitable as most of the bigger banks. Nevertheless, we expect a ROA in the range of 2.5%-3%, over the next few years supported by strong cost control and low risk costs.
The risk position is a positive rating factor, as the bank has one of the strongest credit risk positions in the market. NPLs have traditionally been at the less than 1% level and are expected to remain well below the industry average level in the next 24 months, as the bank intends to maintain its business model of serving a highly selective client base; and having stringent pre-loan application processes. Loan book concentrations are a bit of a ratings restraint, with the top 20 loans being 54% of total advances, while the top loan is 5.6% of total loan book but given the small number of clients this can be expected. Positively, the loan book is diversified in terms of industry. Furthermore, the bank has limited foreign currency lending risk compared to peers.
The funding and liquidity position is adequate, but better than the average tier two or three bank in the Kenyan market. The bank’s funding base is stable with a GCR stable funding ratio good at 101% as it is predominantly funded by customer deposits (70%), while the long-term funding ratio was 120%. Funding concentration is low (top 20 deposits are13% of total deposits).
Outlook
The outlook is Stable, reflecting the stability of the bank and its intention to maintain its current business strategy. An unstable operating environment could pressurise asset quality with a further slowdown in the real estate market.
Rating Triggers
The national scale ratings could come down if asset quality deteriorates or if the bank changes its business strategy. We see limited upside to the rating over the outlook horizon.
Analytical Contacts: Equity Group Holdings Limited
| Primary analyst | Simbarake Chimutanda | Financial Institutions Analyst |
| Johannesburg, ZA | SimbarakeC@GCRratings.com | +27 11 784 1771 |
| Secondary analyst | Thandolwenkosi Mkwanazi | Financial Institutions Associate Analyst |
| Johannesburg, ZA | ThandolwenkosiM@GCRratings.com | +27 11 784 1771 |
| Committee chair | Matthew Pirnie | Sector Head: Financial Institutions |
| Johannesburg, ZA | MatthewP@GCRratings.com | +27 11 784 1771 |
| SC | ||
| Analyst | ||
| TM | ||
| MatthewP@GCRratings.com |
Analytical Contacts: Stima DT Sacco Society Limited
| Primary analyst | Simbarake Chimutanda | Financial Institutions Analyst |
| Johannesburg, ZA | SimbarakeC@GCRratings.com | +27 11 784 1771 |
| Secondary analyst | Thandolwenkosi Mkwanazi | Financial Institutions Associate Analyst |
| Johannesburg, ZA | ThandolwenkosiM@GCRratings.com | +27 11 784 1771 |
| Committee chair | Matthew Pirnie | Sector Head: Financial Institutions |
| Johannesburg, ZA | MatthewP@GCRratings.com | +27 11 784 1771 |
Analytical Contacts: Victoria Commercial Bank Limited
| Primary analyst | Simbarake Chimutanda | Financial Institutions Analyst |
| Johannesburg, ZA | Simbarakec@GCRratings.com | +27 11 784 1771 |
| Secondary analyst | Victor Matsilele | Financial Institutions Associate Analyst |
| Johannesburg, ZA | VictorM@GCRratings.com | +27 11 784 1771 |
| Committee chair | Matthew Pirnie | Sector Head: Financial Institutions |
| 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, June 2019 |
| GCR Financial Institutions Sector Risk Score, July 2019 |
Ratings History
Equity Group Holdings Limited
| Rating class | Review | Rating scale | Rating class | Outlook | Date |
| Issuer Long Term | Initial | National | A(KE) | Stable | July 2005 |
| Last | National | AA-(KE) | Stable | September 2018 | |
| Issuer Short Term | Initial | National | A1-(KE) | Stable | July 2005 |
| Last | National | A1+(KE) | Stable | September 2018 |
Kenya Police Sacco Society Limited
| Rating class | Review | Rating scale | Rating class | Outlook | Date |
| Issuer Long Term | Initial | National | BB+(KE) | Stable | November 2016 |
| Last | National | BB+(KE) | Stable | October 2018 | |
| Issuer Short Term | Initial | National | B(KE) | Stable | November 2016 |
| Last | National | B(KE) | Stable | October 2018 |
Stima DT Sacco Society Limited
| Rating class | Review | Rating scale | Rating class | Outlook | Date |
| Issuer Long Term | Initial | National | BB+(KE) | Stable | December 2013 |
| Last | National | BB+(KE) | Stable | May 2018 | |
| Issuer Short Term | Initial | National | B(KE) | Stable | December 2013 |
| Last | National | B(KE) | Stable | May 2018 |
Victoria Commercial Bank Limited
| Rating class | Review | Rating scale | Rating class | Outlook | Date |
| Issuer Long Term | Initial | National | BBB (KE) | Stable | October 2012 |
| Last | National | BBB+(KE) | Stable | July 2018 | |
| Issuer Short Term | Initial | National | A3(KE) | Stable | October 2012 |
| Last | National | A2(KE) | Stable | July 2018 |
Risk Score Summary
| Risk score | Equity Group | Kenya Police Sacco | Stima Sacco | VCB |
| Operating environment | 7.5 | 6 | 6 | 8 |
| Country risk score | 4.0 | 4.5 | 4.5 | 4.5 |
| Sector risk score | 3.5 | 1.5 | 1.5 | 3.5 |
| Business profile | 2 | -3 | -3.5 | -3 |
| Competitive position | 2 | -3 | -3 | -3 |
| Management and governance | 0 | 0 | -0.5 | 0 |
| Financial profile | 1.5 | 5.5 | 3 | 2.5 |
| Capital and Leverage | 0 | 3 | 1 | 0 |
| Risk | 0.5 | 2 | 1.5 | 2 |
| Funding structure and Liquidity | 1 | 0.5 | 0.5 | 0.5 |
| Comparative profile | 0 | 0 | 0 | 0.5 |
| Group support | 0 | 0 | 0 | 0 |
| Government support | 0 | 0 | 0 | 0 |
| Peer analysis | 0 | 0 | 0 | 0.5 |
| Total Score | 11 | 8.5 | 5.5 | 8 |
| Kenyan National Scale Rating | AA-(KE) | BBB(KE) | BB(KE) | BBB+(KE) |
Glossary
| Benefits | Financial reimbursement and other services provided to insureds by insurers under the terms of an insurance contract. |
| Capital | The sum of money that is invested to generate proceeds. |
| Financial Institution | An entity that focuses on dealing with financial transactions, such as investments, loans and deposits. |
| 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. |
| Loan | A sum of money borrowed by a debtor that is expected to be paid back with interest to the creditor. A debt instrument where immovable property is the collateral for the loan. A mortgage gives the lender a right to take possession of the property if the borrower fails to repay the loan. Registration is a prerequisite for the existence of any mortgage loan. A mortgage can be registered over either a corporeal or incorporeal property, even if it does not belong to the mortgagee. Also called a Mortgage bond. |
| Market | An assessment of the property value, with the value being compared to similar properties in the area. |
| National Scale Rating | National scale ratings measure creditworthiness relative to issuers and issues within one country. |
| Performing Loan | A loan is said to be performing if the borrower is paying the interest on it on a timely basis. |
| Performing | An obligation that performs according to its contractual obligations. |
| Private | An issuance of securities without market participation, however, with a select few investors. Placed on a private basis and not in the open market. |
| Release | An agreement between the creditor and debtor, in terms of which the creditor release the debtor from its obligations. |
| 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 | The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives. |
| Short Term | Current; ordinarily less than one year. |
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 ratings were based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The credit ratings have been disclosed to the rated entities.
The ratings above was solicited by, or on behalf of, the rated entities, and therefore, GCR has been compensated for the provision of the ratings in the following cases: Kenya Police Sacco Society Limited, Stima DT Sacco Society Limited and Victoria Commercial Bank Limited. The ratings on Equity Group Holdings Limited are unsolicited and no compensation has been received.
Kenya Police Sacco Society Limited, Stima DT Sacco Society Limited and Victoria Commercial Bank Limited all participated in the rating process via face-to-face 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 the entities and other reliable third parties to accord the credit rating included:
- Audited financial results as at 31 December 2018;
- Management accounts for 2019;
- Budgeted financial statements for 2019;
- Latest internal and/or external audit report to management;
- A breakdown of facilities available and related counterparties; and
- Industry comparative data.
Equity Group Holdings Limited did not participate in the ratings process, however the quality of public disclosure from audited accounts and investor presentations meets out information sufficiency requirements.