Moody’s assigns first-time local currency bank rating in Uganda

The credit rating agency, Moody’s Investors Service (Moody’s), today May 21 assigned B1/Not Prime local currency long-term and short-term deposit ratings and B3/Not Prime foreign currency long-term and short-term deposit ratings to Stanbic Bank Uganda Limited (Stanbic Uganda).

“We have assigned a Local Currency Deposit rating of B1 to Stanbic Bank Uganda Limited (Stanbic Uganda),  a notch above Uganda’s sovereign issuer rating of B2, stable, to capture both the standalone strength of the bank and our assessment of its ultimate parent, South Africa’s Standard Bank Group Limited (SBG, Issuer rating of Ba1, stable), as a support provider,” says Akintunde Majekodunmi, a vice president and banking analyst at Moody’s.

However,  Stanbic Uganda’s B3 foreign currency deposit rating is constrained by Uganda’s foreign currency deposit rating ceiling of B3. Moody’s also assigned a counterparty risk assessment of Ba3(cr)/Not Prime(cr) and a counterparty risk rating of Ba3/Not Prime. The outlook assigned to the deposit ratings is stable.

The rating agency noted that Stanbic Uganda’s BCA standalone credit strength of B2 captures its (1) large domestic franchise that supports our expectation of continued resilience in its earnings generating capacity and robust capital buffers, which together will continue to provide a thick cushion to withstand potential loan losses (2) improving asset quality metrics and (3) deposit-funded balance sheet and strong liquidity profile. These strengths are moderated by (4) our expectation that the bank will increasingly rely on more confidence-sensitive non-deposit funding as it grows in size over the coming years and (5) large concentration risks in Stanbic Uganda’s loan portfolio.

Why the bank was rated by Moody’s

Moody’s revealed that Stanbic Uganda’s credit profile is underpinned by its robust capital buffers. As of December 2018, Moody’s adjusted tangible common equity (TCE) as a percentage of risk-weighted assets (RWA) stood at 15.8 percent. Stanbic Uganda’s Moody’s adjusted TCE to RWA ratio is significantly higher than the global b2 BCA peer median of 12.7 percent. Going forward, we expect the bank’s capitalisation to remain strong, primarily because of Stanbic Uganda’s resilient profitability metrics, with a return on tangible assets of 4.1percent, as of year-end 2018, versus the b2 median of 1.5percent and a return on assets of 2 percent for the banking system, as at June-end 2018.

Resilience in Stanbic Uganda’s profitability reflects the bank’s strong banking franchise in Uganda being Uganda’s largest bank (18 percent market share in loans) and serving over 0.5 million customers. The drop in the yields of Stanbic Uganda’s government portfolio, on account of the central bank’s monetary easing, has been offset by interest revenues and commission income from robust loan growth.

Stanbic Uganda’s loan portfolio grew 18 percent over 2018 versus 11 percent for the banking system. We expect profitability to continue to be buoyed by Stanbic Uganda’s robust loan growth over the next 18 months as the bank seeks to grow its lending business in the oil and gas space and in the small and medium-sized enterprises (SME) sector, pursue a digitally lead retail banking strategy and increase staff productivity. Additionally, loan growth will be supported by our expectation that economic growth will remain high.

Another driver of Stanbic Uganda’s stand alone credit profile is its improving nonperforming loan (NPL) metrics and risk management processes and procedures. Moody’s adjusted NPLs fell from 6.8 percent, as of year-end 2017, to 5.3 percent, as of year-end 2018. Though we note that this improvement in NPLs is mainly attributable to the reperformance of a single corporate borrower, we still expect actions taken by Stanbic Uganda in recently years to continue to put downward pressure on NPLs.

For example, the bank has significantly reduced foreign currency lending (foreign currency loans makeup 37 percent of loans compared to above 50 percent in recent years) and has plans to cut commercial property lending, both of which it considers relatively risky assets classes. Additionally, relationship managers are now managing a much smaller portfolio than in the recent past, the bank is implementing fully automated integrated workflow systems across lines of business and has recently introduced a new collections module to improve account management and recoveries on defaulted loans.

However, concentration risk in Stanbic Uganda’s loan portfolio is high. Like other banks in sub-Saharan Africa, Stanbic Uganda’s top 20 largest borrowers make up a significant size of total loans (56 percent as of year-end 2018) and are almost two times the bank’s tangible common equity exposing the bank to large spikes in NPLs and material reductions in capital should just a

What could change the ratings

An upgrade in the bank’s ratings could be triggered by an upgrade of SBG’s ratings combined with improvements in the financial profile of the bank.

According to Moody’s Stanbic Uganda’s ratings could be downgraded in the event of a downgrade of Uganda’s rating ceilings or if we assess that SBG’s willingness to provide support in future will decline below our current assumptions. Also, any significant deterioration in the financial profile of Stanbic Uganda could negatively impact the bank’s standalone credit profile and deposit ratings.

Currently, Stanbic is the largest lender and holds the largest number of deposits in the Ugandan market.