Fitch Affirms Stanbic Bank Kenya at ‘BB-‘; Outlook Negative

Ratings

Fitch Ratings has affirmed Stanbic Bank Kenya (NSE; CFC) Limited’s Long-Term Issuer Default Rating (IDR) at ‘BB-‘ with a Negative Outlook.

The agency notes that the decision to affirm Stanbic’s Rating was driven by a moderate probability of support from its ultimate parent, South Africa-based Standard Bank Group (SBG; BB+/Stable), which indirectly owns 60% of the lender. The bank’s IDRs are constrained by the Kenyan Country Ceiling of ‘BB-‘. If not for this, Fitch would most likely rate SBK one notch below SBG.

The Negative Outlook on Stanbic’s Long-Term IDR reflects the Negative Outlook on Kenya’s rating (B+/Negative) and the possibility that Kenya’s Country Ceiling will also be revised down in the event the sovereign is downgraded.

Fitch’s view of support considers Standard Group Bank’s (SBG) strong ability to support Stanbic Kenya, which represents around 1.4% of SBG’s assets. It also reflects a high propensity to support, given a public commitment by SBG to support its strategic subsidiaries (including Stanbic Bank), as well as the role played by Stanbic in the group’s pan-African strategy.

“We view SBK as a strategically important subsidiary of SBG, despite it operating outside of the group’s home market of South Africa. We also see a high level of integration between the bank and the group at management level and the use of common products, risk policies and processes, systems and branding. Kenya presents an important growth market for Standard Bank Group and is the gateway for the group’s East-African operations. Stanbic has a 5% market share of banking assets in Kenya and is primarily a corporate bank.” noted Fitch. “Stanbic’s National Ratings reflect Fitch’s view of the bank’s relative creditworthiness within Kenya. As Fitch does not expect any change in the bank’s creditworthiness relative to domestic peers, the Outlook on SBK’s National Rating is Stable.”

Viability Rating (VR)

Stanbic’s Viability Rating (VR) reflects Kenya’s challenging operating environment, slowing loan growth and the fall in earnings and profitability due to the cap on lending and deposit rates introduced by the government in September 2016. Fitch also notes that asset quality is deteriorating due to weaker operating conditions, but Stanbic’s impaired loan ratio of 5% is below the sector average of 10%.

“However, our assessment of its asset quality also considers large credit concentrations, high restructured loans and low loan loss coverage.” said Fitch in a statement on its website.

“The Viability Rating also takes into account Stanbic’s strengths in corporate and investment banking, risk framework and management quality as well as the significant operational benefits of being part of Standard Bank Group. SBK’s capitalisation is good (total regulatory capital adequacy ratio of 18.1% and Fitch core capital ratio of 15.6% at end-2016). In our view, good capital buffers are prudent because of the bank’s sensitivity to concentration risk.”

RATING SENSITIVITIES
IDRS, SUPPORT RATING AND NATIONAL RATINGS
A downgrade of Kenya’s sovereign rating accompanied by a downward revision of the Country Ceiling would result in a downgrade of SBK’s Long-Term IDR and SR.

The IDRs and SR are also sensitive to changes in the parent’s ability and propensity to support the subsidiary. This is not Fitch’s base case. However, any potential downgrade of SBK’s Long-Term IDR and SR would require a downgrade of more than two notches of the parent, assuming no changes in Fitch’s view of the strategic importance of SBK to its parent.

An upgrade of the Long-Term IDR is unlikely given the Negative Outlook on the Kenyan sovereign rating.

The National Ratings could be downgraded only in case there is material weakening of SBG’s ability or propensity to provide support to SBK. Fitch views this as unlikely at present.

Viability Rating
SBK’s VR is sensitive to further worsening in the operating environment leading to material asset quality deterioration, affecting earnings and ultimately eroding the capital base.

We view an upgrade of the VR as unlikely at present as it would require an improvement in the operating environment coupled with more stable sources of earnings as well as higher loan loss reserve coverage.

The rating actions are as follows:

Long-Term IDR affirmed at ‘BB-‘; Outlook Negative
Short-Term IDR affirmed at ‘B’
Support Rating affirmed at ‘3’
Viability Rating affirmed at ‘b’
National Long-Term Rating affirmed at ‘AAA(ken)’; Outlook Stable
National Short-Term Rating affirmed at ‘F1+(ken)’

Source: Fitch Ratings