Global Credit Ratings has affirmed Bank of Kigali Limited’s long-term and short-term national scale ratings of AA-(RW) and A1+(RW) respectively; with the outlook accorded as Stable. The ratings are valid until September 2018.
SUMMARY RATINGS RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Bank of Kigali Limited (“BK”, “the Bank”) based on the following key criteria:
The Bank’s ratings reflect its long history and leading domestic market position by assets. The Bank’s strong capitalisation, comfortable liquidity position and resilient earnings performance in a challenging economic climate are key rating factors as well.
The ratings also reflect potential support from the Rwandan authorities if required, given BK’s domestic systemic importance owing to its relatively large balance sheet size and client base. Furthermore, the Government’s controlling stake in BK (29.5% directly and 25% through the Rwanda Social Security Board) and the Bank’s role in broadening access to banking channels and products in Rwanda, increases the likelihood of support.
The Bank’s total capital adequacy ratio (“CAR”) and Tier 1 CAR declined to 19.6% and 19% at FY16 respectively (FY15: 22.5% and 22.1%), although remaining well above the regulatory minima of 15% and 10% respectively, calculated in line with Basel I principles. The continuous decline in capital adequacy ratios is attributable to an increasingly risky balance sheet, with loans and advances (largest asset class on balance sheet) increasing to 60.4% of total assets at FY16 (FY15: 55.9%, FY14: 48.4%).
Notwithstanding asset quality pressures noted in the banking sector on the back of a challenging economic climate, BK’s gross non-performing loan (“NPL”) ratio continued to improve to 5.2% at FY16 (FY15: 5.8%, FY14: 6.6%), supported by loan growth, improved recoveries, and enhanced underwriting practices. The average industry gross NPL ratio was 7.6% at end-2016 up from 6.2% at end-2015. The Bank targets a gross NPL ratio of less than 5%. Furthermore, portfolio at risk (NPLs plus past due but not impaired loans) decreased to 9.6% at FY16 (FY15: 13.7%, FY14: 21.0%), largely as a result of the vast majority of special mention loans moving to the performing loans bucket over the cycle. However, net past due loans remained high at 28% relative to core capital at FY16, albeit improving over the past three financial years. Specific provision coverage of NPLs remained stable (42.3%) at FY16.
The Bank recorded a pre-tax profit of FRw30bn in FY16, up from FRw25.7bn in FY15. This is mainly attributable to growth of 20.5% in net interest income despite a rise in funding costs, and an increase (34.1% on average) in non-funded income. Furthermore, the cost/income ratio for FY16 remained somewhat stable at a lower 47.4%, as the Bank continued to maximise returns. Obscuring growth in pre-tax profit, headline earnings grew by a modest 1.3%, largely driven by a tax increase of 30.8% of pre-tax profit (FY15: 20.4%). Consequently, ROaE and ROaA declined to 20% and 3.5% at FY16 respectively. Nonetheless, the Bank’s returns remain attractive comparing favourably to peers.
BK displays significant contractual asset/liability mismatches, a feature common to all industry players, due to its loan book being largely funded by short-dated customer deposits. That said, the negative liquidity gap for the 30 days maturity bucket increased, covering core capital 1.3x at FY16. To mitigate a liquidity risk from maturity mismatches, the Bank has increased funding sources by securing additional long-term lines of credit. Furthermore, liquidity risk is mitigated through maintaining a portfolio of highly liquid assets on balance sheet. Consequently, the Bank maintained a liquidity ratio above the statutory minimum of 20% throughout FY16.
Strong asset quality, ensuring a capital buffer to support the increasing balance sheet risk, and maintaining stronger earnings generation supported by the Bank’s leading market position, could lead to upward ratings migration. Negative rating action would likely follow a reversal in trends in asset quality metrics currently observed, shrinking of the capital buffer required to support an increasingly risky balance sheet, and weaker earnings generation.
NATIONAL SCALE RATINGS HISTORY
| Initial rating (October 2010) | Last rating (September 2016) | |
| Long-term: A+(RW); Short-term: A1(RW) | Long-term: AA-(RW); Short-term: A1+(RW) | |
| Outlook: Stable | Outlook: Stable |
