October 5, 2017 / 3:15 PM / a year ago

Fitch Revises TDB's Outlook to Positive; Affirms at 'BB'

(The following statement was released by the rating agency) PARIS/LONDON, October 05 (Fitch) Fitch Ratings has revised Eastern and Southern African Trade and Development Bank's (TDB - formerly PTA Bank) Outlook to Positive from Stable and affirmed the Long-term Issuer Default Rating (IDR) at 'BB'. The Short-term IDR has been affirmed at 'B'. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS The revision of the Outlook to Positive reflects TDB's improving credit profile underpinned by consistent progress in the last two years, in particular the improvement in capitalisation metrics, and the bank's shift to a more cautious lending strategy, which should translate, in the medium term, into moderately stronger capitalisation. TDB's ratings are driven by the bank's intrinsic credit quality, assessed by Fitch at 'bb'. Solvency and liquidity are both assessed at 'bbb', and a three-notch negative adjustment is applied to reflect Fitch's view of the weakness of the bank's business environment. TDB's capitalisation is strong. The bank's equity-to-assets ratio improved in 2016 and 1H17, and is expected by Fitch to remain close to 19% over 2017-2020. This reflects the success of the capital increase launched in 2013 and slower lending growth projected for the next three years, as management adopts a less aggressive strategy. TDB also enjoys high internal capital generation, with its profitability well above peers'. Additionally, two new countries (Mozambique (Restricted Default) and Swaziland) and an institutional shareholder have recently joined the bank, and dividends to class A shareholders have been capitalised. Fitch's assessment of TDB's overall risk profile is moderate, mainly due to the bank's exposure to credit risk. Large trade finance facilities with sovereigns such as Zambia (B/Negative), and Sudan account for a large share of the portfolio, leading to a rise in sovereign lending in recent years (49% of banking exposure in 2016, vs. 38% in 2014). The estimated average credit quality of loans is 'B-', reflecting the focus on lowly-rated African countries and exposures to the private sector. However, trade finance operations, which represent a predominant part of the bank's activities, are well-collateralised overall. Credit mitigants for sovereign trade finance deals include cash collateral and insurance policies. Concentration risk is moderate relative to peers and has increased in the last three years, as a result of the focus of trade facilities to Zambia and Sudan; the bank also holds a large portfolio of Malawi bonds, funded by deposits from the Malawi central bank. The five largest exposures accounted for 55% of portfolio at end-2016. This ratio is expected to decrease moderately by 2020, as the bank diversifies its lending to new sovereign member states and the private sector. Despite the modest treasury assets portfolio of the bank, liquidity is assessed at 'bbb'. This takes into account the short maturity of loans (60% of unimpaired trade finance loans are treated as liquid assets) and substantial unused bank facilities. TDB has good access to financial markets; it issued a USD700 million Eurobond in 2017, repayable in 2022, and has access to funding from international banks and development institutions. However, the quality of treasury assets is weak, with less than 8.5% invested in banks rated 'AA-' or above. Fitch applies a three notch downward adjustment to TDB's intrinsic rating, reflecting the bank's high risk business profile and operating environment. Although governance is improving, TDB is a small bank, with substantial exposure to the private sector. Its lending strategy, which is still based on extending large facilities to African countries having difficulty accessing financial markets, and to the private sector, presents significant risk in Fitch's view. The bank's operating environment is also challenging: countries of operation are low-income, lowly rated, and their business climate is weak overall. Political risk in the country of head office in Kenya is significant, though this will somewhat improve as a result of the opening of a second principal office in Mauritius. Shareholders' capacity to support TDB is low, with an average rating of key shareholders of 'B-' at end-June 2016. Furthermore, in Fitch's view, the propensity of key shareholders to provide support in case of need is fairly weak. RATING SENSITIVITIES The main factors that could, individually or collectively, lead to positive rating action are as follows: -Demonstrated capacity to maintain the equity-to-assets ratio in a range of 18%-20%, and a loan impairment ratio below 3%; -Sustained track record of controlled growth in lending; and -Improvement in Fitch's assessment of the bank's liquidity position. As the Outlook is Positive, Fitch does not anticipate developments with a high likelihood of triggering a downgrade. However, the following factors could, individually or collectively, result in negative rating action: -An accumulation of arrears on loans or a default on one of its large sovereign exposures (Sudan, Zambia, Zimbabwe); -Material deterioration in capitalisation, for example following a rapid rise in lending; and -Marked deterioration in liquidity indicators. KEY ASSUMPTIONS Fitch assumes no material change in the economic growth outlook for the east and southern African region and no significant change in commodity prices in the short-term. The full list of rating actions is as follows: - Long-Term IDR: affirmed at 'BB', Outlook revised to Positive from Stable - Short-Term IDR: affirmed at 'B' - National Long-Term Rating: affirmed at 'AAA(ken)', Outlook Stable - USD1 billion senior unsecured medium term note programme: affirmed at 'BB'/'B' - Senior unsecured notes: affirmed at 'BB' Contact: Primary Analyst: Eric Paget-Blanc Senior Director +33 1 44 29 91 33 Fitch France SAS 60 rue de Monceau 75008 Paris Secondary Analyst: Nicholas Perry Analyst +44 20 3530 1795 Committee Chairperson Tony Stringer Managing Director +44 20 3530 1219 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. 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