Fitch Ratings has affirmed KCB Group PLC‘s its core banking subsidiary KCB Bank Kenya Limited’s LongTerm Issuer Default Ratings (IDRs) at ‘B+’. The outlooks, according to Fitch, are negative.
Fitch has withdrawn the Support Rating and Support Rating Floor of KCB Bank and KCB Group as they are no longer relevant to the agency’s coverage following the publication
of its updated Bank Rating Criteria on November 12, 2021.
“In line with the updated criteria, we have assigned a Government Support Rating (GSR) of ‘b+’ to KCB Bank and ‘no support’ (ns) to KCB Group,” Fitch said in a statement.
KCB Group’s and KCB Bank’s Long-Term IDRs are driven by their standalone creditworthiness, as expressed by their Viability Ratings (VRs) of ‘b+’. KCB Bank’s long term IDR is underpinned by a limited probability of government support, as reflected in its GSR of ‘b+’.
The Negative Outlooks on both entities’ long-term IDRs mirror the negative outlook on Kenya’s ‘B+’ Long-Term IDR. This reflects the concentration of their operations within Kenya and significant sovereign exposure.
The National Ratings of KCB Group and KCB Bank reflect their relative creditworthiness within Kenya. The Outlooks on the National Long-Term Ratings have been revised to Stable from Negative as Fitch does not expect any change to the entities’ creditworthiness relative to domestic peers’.
The VRs of KCB Group, a non-operating bank holding company, and KCB Bank, its main operating bank, are the same as the ‘group VR’, based on the consolidated assessment of KCB Group. KCB Bank represents the majority (end1Q22: 74%) of KCB Group’s consolidated assets. KCB Group’s VR also reflects no double leverage at the holding company and high capital and liquidity fungibility within the group.
KCB Group has leading market shares of assets (end-2021: 16%) and deposits (17%) in its home market, mainly through KCB Bank and, to a lesser extent, National Bank of Kenya.
The recent acquisition of Banque Populaire du Rwanda PLC increased the contribution of its foreign subsidiaries to over 14% of total assets at end2021 (end-2020: 10%), supporting geographical diversification and the regional franchise.
Operating Environment Risks
The threat of global stagflation and Kenya’s August 2022 general election pose downside risks to economic growth. Fitch estimates real GDP growth to slow to 6% in 2022 from 6.5% in 2021. Inflationary pressures are likely to lead the Central Bank of Kenya to tighten monetary policy further.
KCB Group’s asset quality metrics have deteriorated since the pandemįc and are weaker than peers’. Its impaired loans (Stage 3 loans under IFRS 9) ratio remained a high 16.3% at end-2021. Operating-environment uncertainty increases risks to asset quality. Total loan loss allowance coverage of impaired loans fell to 57.3% at end-2021 (end-2020: 60.2%), well below KCB Group’s target of 75%.
KCB Strong Recovery in Profitability
Profitability recovered strongly in 2021 mainly due to a sharp fall in loan impairment charges (LICs), despite asset-quality pressures. KCB’s Group’s operating profit/risk-weighted assets (RWA) ratio improved to 5.4% in 2021 (2020: 3.3%), supported by a wide net interest margin (10%) and good cost management (cost/income ratio: 44%). Earnings will remain strong given KCB Group’s franchise strengths but we expect some pressure on profitability in 2022 from LICs amid elevated impaired loans and moderate provisioning levels.
Strong Capitalisation: KCB Group’s Fitch Core Capital (FCC) ratio improved to 19.1% at end-2021 (end-2020: 17.2%) due to strong internal capital generation and low dividend payments. Unreserved impaired loans represented a high 31% of FCC at end-2021 but risks to capital are mitigated by robust pre-impairment operating profit (2021: above 9% of average loans).
KCB Group’s funding profile is dominated by customer deposits (end-2021: 91% of total non-equity funding). Deposits are mainly in the form of demand and savings accounts (end-2021: 70% of deposits) and represent a high share of retail deposits (48%), supporting a stable and inexpensive funding profile. KCB Group’s loans/deposit was high (end-2021: 89%), reflecting moderate liquidity buffers. Liquid assets covered 45% of customer deposits at end-2021.
KCB Group’s GSR of ‘ns’ reflects Fitch’s view that government support is unlikely to extend to a non-operating bank holding company given its low systemic importance and a liability structure that may be more politically acceptable to be bailed in. KCB Bank’s GSR of ‘b+’ considers a high propensity of the authorities to provide support to the bank given its systemic importance but also Kenya’s limited financial flexibility, as captured in the sovereign rating.
KCB Group’s Long-Term IDR is sensitive to a downgrade of its VR. KCB Bank’s LongTerm IDR is sensitive to a simultaneous downgrade of its VR and downgrade of its GSR. A downgrade of KCB Group’s and KCB Bank’s VRs and KCB Bank’s GSR would most likely result from a downgrade of Kenya’s sovereign rating.
A downgrade of the VRs could also result from greater-than-expected asset-quality pressure, including from lowly provisioned loans, particularly if this results in a marked weakening in earnings and capitalisation.
The National Ratings are sensitive to Fitch’s view of the entities’ creditworthiness relative to other issuers within Kenya.
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years.
The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance.
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