Coronavirus erodes KCB Group PLC’s credit score

Thursday, May 28th, 2020 00:00 |
A KCB banking hall. Photo/PD/FILE

Seth Onyango @SethManex

Global credit rating agency, Fitch Ratings Inc has affirmed KCB Group PLC’s Long-Term Issuer Default Rating (IDR) at ‘B+’ and a Viability Rating (VR) at ‘B+’ with stable outlook. 

KCB’s negative outlook is based on the expected pressure on its creditworthiness stemming from the economic impact of coronavirus and the resulting impact on its financial profile.

“The Rating Watch Negative (RWN) placed on these ratings following the announcement of an offer made to acquire National Bank of Kenya Ltd (NBK) has been removed and a Negative Outlook has been assigned to the Long-Term IDR,” the agency stated.

B1/B+ is one of several non-investment grade ratings, also known as “junk” that may be assigned to a company, fixed-income security or floating-rate loan. 

This rating signifies that the issuer is relatively risky, with a higher than average chance of default. 

According to Fitch, given that KCB Bank represents the dominant part of KCB Group (75 per cent of total assets at end-2019) and in order to capture group-related risks, its VR is based on a consolidated assessment of the group. 

Weak asset quality

“The VR reflects a challenging operating environment and weak asset quality, balanced against a leading domestic franchise and strong profitability, capitalisation and funding and liquidity,” read their statement in part.

KCB Group’s VR is equalised with the consolidated risk assessment of the group given low double leverage at the holding company level, as well as high capital and liquidity fungibility within the group.

Still, KCB Group produces strong profitability metrics, with operating returns over risk-weighted assets averaging 5.8 per cent over the past four years.

“Profitability metrics tend to be among the strongest in the sector, driven by a wide net interest margin that benefits from low cost of funding, healthy non-interest income and loan impairment charges that have eroded a fairly small proportion of pre-impairment profit in recent years,” said Fitch.

In more difficult operating conditions, worsened by the Covid-19 pandemic, the agency expects to see pressure on profitability metrics as a result of increased loan impairment charges, moratoriums on capital and interest payments for borrowers and a period of lower interest rates.

KCB Group’s funding profile was dominated by a large customer deposit base at 94 per cent of total funding as at end of 2019.

Stable funding

Customer deposits are mainly in the form of demand and savings accounts (72 per cent at end-first quarter of 2020) and comprise a high proportion of retail (48 per cent at end-2019) and government-related (32 per cent) deposits that provide low-cost and stable funding.

In Fitch’s view the addition of NBK’s large government-related and retail deposit base is positive for KCB Group’s cost of funding.

Balance-sheet liquidity is healthy, as reflected by a fairly low loans/customer deposits ratio (85 per cent at end-2019), albeit prudent in view of large single-depositor concentrations.

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