S&P: KCB Group Ltd. 'B+/B' Ratings Affirmed; Outlook Remains Negative
The affirmation reflects our view that KCB's business position will help the bank to maintain adequate financial performance and asset quality at current levels. The latter deteriorated with the ratio of nonperforming loans (NPLs) to total loans reaching 9.5% at the end of June 2016 as a result of the country's deteriorating economic environment and currency depreciation.
The ratings on KCB are supported by the bank's strong domestic corporate franchise and its increasing penetration of the Kenyan retail market. We believe KCB is well placed to maintain its revenue stability in the context ofrising external shocks and weaker domestic economic growth. While we expect credit losses will increase, we think that the group's access to low-cost deposits, stronger margins than peers operating in Kenya, and well-establishedcorporate lending franchise will support its earning generation over the next 12-18 months.
KCB's operations are concentrated in Kenya, but its regional operations are expanding in countries in the East African Community (EAC; comprises Burundi, Kenya, Rwanda, Tanzania, and Uganda), where the bank generated about 20% of its revenues and 10% of total profits before tax in 2015. The bank has operations in some relatively riskier countries, such as South Sudan and Burundi. The related risks are partly mitigated by the low loan leverage in these countries and the fact that a significant part of this business is made of self-liquidating trade finance operations with Kenyan entities.
We anticipate that the group's capitalization will remain moderate over the next 12-18 months, despite earnings compression on the back of the interest rate cap imposed by legislators in Kenya. As a result, we anticipate that the bank's loan growth will be more muted in the low-single digits in 2016-2017. We project a S&P Global Ratings' risk-adjusted capital (RAC) ratio before adjustments for diversification of 5.5%-6.0% over the same period. This is in line with the bank's capitalization that was closer to the minimum regulatory requirement at year-end 2015.
KCB's loan portfolio is fairly diversified across sectors, reflecting the diversification of the Kenyan economy and its buoyant private sector. KCB's historical loan-loss experience has been good in the context of its high-risk operating conditions, averaging 0.7% over the past five years. However, we expect credit losses will increase close to 2.0% over the next two years afterthey jumped to 1.2% at end-June 2015 from 0.7% at year-end 2015. Such an increase is due to weakened economic growth. At the same time, we expect NPLs will hover at about 7.5% through 2016, although we believe there could be somevolatility due to a degree of single-name concentration. Top-20 loans totaled about 30% of total loans and 1.2x of total adjusted capital at year-end 2015.
KCB is funded by short-term customer deposits and benefits from a sizable portfolio of liquid assets. The core customer deposits to total funding ratio stood at 92% at March 31, 2016. KCB's deposit base remains granular with top-20 depositors accounting for less than 10% of total deposits at year-end 2015. The bank’s net loan-to-core customer deposit ratio stood at 81% as of March 31, 2016, which compares favorably with that of regional peers. The large portion of assets in the form of cash, treasury bills, or bank placements--about 33% of consolidated assets as of March 31, 2016--underpins our assessment of liquidity as adequate.
The ratings on KCB reflect its group credit profile and do not incorporate anynotches of uplift for government support. We consider KCB to be of high systemic importance in Kenya, but our classification of the Kenyan government's support to its domestic banking sector as uncertain results in a low likelihood of extraordinary government support in case of stress.
The negative outlook on KCB mirrors that on the sovereign and reflects the pressure on the bank's asset quality and capitalization over the next 12 months. Kenya's fiscal position could deteriorate beyond our current expectations, leading to higher debt stocks, which in turn could increase external vulnerabilities and negatively impact the banking sector, including KCB.
We would lower the ratings on KCB if we lowered the ratings on Kenya, as we would not rate the bank higher than the sovereign. We could also lower the ratings on the bank if asset quality deteriorates beyond our expectations overthe next 12 months or if the bank breaches minimum regulatory requirements, although this is not our base-case scenario.
We would revise the outlook to stable if we revised the outlook on the sovereign to stable, all else remaining equal.