GCR affirms Kenya Police Sacco Society Limited’s rating of BB+(KE); Outlook Stable.

31 Oct 2018 In Rating Notifications

GCR affirms Kenya Police Sacco Society Limited’s rating of BB+(KE); Outlook Stable.

Johannesburg, 31 October 2018—Global Credit Ratings has affirmed Kenya Police Sacco Society Limited’s long-term and short-term national scale ratings of BB+(KE) and B(KE) respectively; with the outlook accorded as Stable. The ratings are valid until October 2019.

SUMMARY RATINGS RATIONALE

Global Credit Rating (“GCR”) has accorded the above credit ratings to Kenya Police Sacco Society Limited (“Kenya Police Sacco”, “the society”) based on the following key assumptions:

The ratings on Kenya Police Sacco are supported by strong capitalisation, stable funding and liquidity, good asset quality, and low single name concentration. The ratings are however restrained by the small and monoline business, although we view the niche to be defendable. The ratings are also limited by weak prudential regulation of the industry relative to commercial banks and lack of access to central bank funding and support.

Capitalisation is strong, underpinned by sound earnings and increased member contributions. Core capital grew by 37.1% to KES5.9bn at FY17, to support a strong capital adequacy ratio of 25% against regulatory minimum of 10%. Growth in after tax earnings normalised albeit still healthy at 54%, following significant uptake of mobile loans launched in the prior year. IH18 performance continued to be strong regardless of loan loss reserve coverage remaining more than sufficient at 108.6%. We expect credit losses to trend within moderate ranges, supporting bottom line earnings. Overall, dividend rate has remained conservative at 17% of share capital, supporting healthy retention of earnings.

Funding and liquidity are good given the structure of funds. Funding takes the form of equity and member deposits accounting for 90% of total funding at FY17. Member deposits are behaviourally sticky because they are only withdrawable upon cessation. Liquidity is also good, supported by the long-term member deposits, membership growth, as well as the shortened tenure of loans. This is evidenced by the liquidity ratio which was maintained at good levels of 33%, providing significant headroom above regulatory minimum of 15%.

Asset quality is stable. Although the gross non-performing loan ratio (“NPL”) rose to 3.1% at FY17 owing to four months arears of civil servants’ salary, it improved slightly to 3.0% by 1H18. We nonetheless view the high-quality collateral held as broadly positive. Cash (members deposits) covered 72% of the loan book at FY17. Overall, the society’s NPLs ratio continues to trend below industry average of 5.2% and regulatory prudential maximum of 5%.

Risk concentration is moderate. Single name concentration is very low with NPLs net of provisions accounting for 3% of capital at FY17, while top 20 exposures accounted for 0.4% of the total loan book. However, the business is highly concentrated as 98% of lending is to employees of the National Police Service (“NPS”), with the balance targeting the wider business community. The scope for growth and profitability is dependent on government policies on NPS and other related institutions. This lack of diversification is viewed negatively.

Improved business diversification, strengthened regulatory oversight, improved financial flexibility coupled with sustained financial profile is viewed as broadly positive. Reduction in earnings capacity, weakened capitalisation, and less stringent regulatory oversight may bring down the rating.

 

NATIONAL SCALE RATINGS HISTORY    
     
Initial rating (November 2016)   Last rating (November 2017)
Long-term: BB+(KE); Short-term: B(KE)   Long-term: BB+(KE); Short-term: B(KE)
Outlook: Stable   Outlook: Stable
     

 

ANALYTICAL CONTACTS

Primary Analyst   Committee Chairperson
Simbarake Chimutanda   Matthew Pirnie
Credit Analyst   Sector Head: Financial Institution Ratings
(011) 784-1771   (011) 784-1771
.(JavaScript must be enabled to view this email address)   .(JavaScript must be enabled to view this email address)
     

 

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Global Criteria for Rating Banks and Other Financial Institutions (March 2017)

Criteria for Rating Finance and Leasing Companies (March 2017)

Kenya Police Sacco Society Limited rating reports (2016-2017)

 

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 ratings were 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.

Kenya Police Sacco Society Limited 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 credit ratings have been disclosed to Kenya Police Sacco Society Limited.

Information received from Kenya Police Sacco Society Limited and other reliable third parties to accord the credit ratings included:

• Audited financial results of the society as at 31 December 2017 (plus four years comparative numbers);

• Unaudited interim results of the society as at 30 June 2018;

• Budgeted financial statements for 2018;

• Latest internal and/or external audit report to management;

• A breakdown of facilities available and related counterparties;

• Corporate governance and enterprise risk framework; and

  •       Industry comparative data and regulatory framework.

The ratings above were solicited by, or on behalf of, Kenya Police Sacco Society Limited, 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.
Balance Sheet Also known as a Statement of Financial Position. A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been financed.
Capital The sum of money that is invested to generate proceeds.
Cash Funds that can be readily spent or used to meet current obligations.
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.
Dividend The portion of a company’s after-tax earnings that is distributed to shareholders.
Equity Equity (or shareholders’ funds) is the holding or stake that shareholders have in a company. Equity capital is raised by the issue of new shares or by retaining profit.
Facility The grant of availability of money at some future date in return for a fee.
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.
Interest Rate The charge or the return on an asset or debt expressed as a percentage of the price or size of the asset or debt. It is usually expressed on an annual basis.
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.
Liquid Assets Assets, generally of a short term, that can be converted into cash.
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.
Margin The rate taken by the lender over the cost of funds, which effectively represents the entity’s profit and remuneration for taking the risk of the loan; also known as spread.
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.
Net Interest Margin Net interest income divided by average interest earning assets. Measures a bank’s margin after paying funding sources and how successful a bank’s interest-related operations are.
Provision The amount set aside or deducted from operating income to cover expected or identified loan losses.
Retained Earnings Earnings not paid out as dividends by a company. Retained earnings are typically reinvested back into the business and are an important component of shareholders’ equity.
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.
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 glossary of terms please click here

 

 

 

 

 

 

 

 

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