Moody's assigns first-time local currency deposit ratings of B1 to Stanbic Bank Uganda with a stable outlook
Moody's Investors Service has 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'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. A full list of the banks' ratings is at the end of this press release. The Local Currency Deposit rating of B1 assigned to Stanbic Bank Uganda is a notch above Uganda's sovereign issuer rating of B2, stable, and captures 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.
The Local Currency Deposit ratings incorporate 1 notch of rating uplift on top of the bank's Baseline Credit Assessment (BCA) of b2 on account of our expectation of a 'High' willingness of support by SBG, in a stress scenario.
Stanbic Uganda's BCA, its standalone credit strength, of b2 captures its 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, improving asset quality metrics and deposit-funded balance sheet and strong liquidity profile.
These strengths are moderated Moody’s expectation that the bank will increasingly rely on more confidence-sensitive non-deposit funding as it grows in size over the coming years and large concentration risks in Stanbic Uganda's loan portfolio.
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%.
Stanbic Uganda's Moody's adjusted TCE to RWA ratio is significantly higher than the global b2 BCA peer median of 12.7%. 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 4.1%, as of year-end 2018, versus the b2 median of 1.5% and a return on assets of 2% 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% 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% over 2018 versus 11% 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 (we forecast real GDP growth of 6.3% in 2019 versus 6.2% in 2018).
Another driver of Stanbic Uganda's standalone credit profile is its improving nonperforming loan (NPL) metrics and risk management processes and procedures. Moody's adjusted NPLs fell from 6.8%, as of year-end 2017, to 5.3%, 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 make up 37% of loans compared to above 50% 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% 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 few of these borrowers default.
PROFILE Stanbic Uganda's BCA also reflects the bank's solid liability profile. The bank is predominantly deposit funded with a low reliance on more sensitive market funds (deposits made up about 88% of the bank's liabilities, as of year-end 2018).
The bank also considers 56% of deposits retail in nature which are more granular and less confidence-sensitive than corporate deposits. However, the bank plans on raising non-deposit funding in future in order to grow its loan portfolio; this will increase the reliance on more confidence-sensitive market funding; though this increase is expected to be gradual.
The bank maintains a solid foreign currency liquidity profile with a foreign currency liquid assets to total foreign currency assets ratio of 30%, as of end-2018. Overall, the bank's liquidity profile is stronger than international peers with a liquid banking assets to tangible banking assets ratio of 48%, as of end-2018, versus a median for its b2 BCA peers of 33%.
However, we expect liquidity to fall over the next 18 months but remain at moderate levels as the bank converts some of its liquid risk-free exposure in government securities into risk-assets/loans.
Stanbic Uganda's ratings incorporate a 'High' likelihood of affiliate support from its ultimate parent, SBG, based on the following: the group's 80% ownership of the bank; Stanbic Uganda's association with the Standard Bank brand (including the use of its logo); and the relatively small contingent liability of a Stanbic Uganda recapitalization versus the size of Standard Bank Group's balance sheet, Stanbic Uganda makes up around 1% of the group's total assets.
Stanbic Uganda's global-scale ratings do not benefit from any government support uplift given that its adjusted BCA is higher than that of the sovereign issuer rating of B2.
Notwithstanding, we assume a high probability of government support in case of need. Stanbic Uganda is Uganda's largest bank with a 19% market share in terms of total assets and has been given the designation of Domestic Systemically Important Bank (D-SIB) by the Bank of Uganda (the central bank and regulator).
Our support assumptions are also supported by authorities' track record of supporting troubled banks in the past.
In 2016 and 2017, the government recapitalized an insolvent bank, Crane Bank; no depositors lost money.
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. Stanbic Uganda's ratings could be downgraded in the event of a downgrade of Uganda's ratings 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.