Moody’s affirms ratings of Tanzanian banks; changes outlook to negative

DAR ES SALAAM (Capital Markets in Africa) – Moody’s Investors Service has today affirmed the B1/ Not Prime long and short-term local-currency deposit ratings and the B2/ Not Prime long and short-term foreign-currency deposit ratings of NMB Bank PLC and CRDB Bank Plc. The outlook on the banks’ long-term deposit ratings was changed to negative, from stable.

At the same time, Moody’s has affirmed NMB Bank PLC’s b1 baseline credit assessment (BCA), b1 adjusted BCA, and Ba3(cr)/ Not Prime(cr) Counterparty Risk Assessment (CR Assessment) and CRDB Bank Plc’s b2 BCA, b2 adjusted BCA, and B1(cr)/ Not Prime(cr) CR Assessment.

A full list of affected ratings can be found at the end of this press release.

RATINGS RATIONALE
RATIONALE FOR RATING AFFIRMATION
Today’s affirmations of the two Tanzanian banks’ ratings reflects to varying degrees their leading domestic franchises, characterized by deposit-based funding profiles, solid liquidity levels and capital buffers that provide a strong recurring loss absorption capacity. These credit strengths protect these banks against the current challenges in Tanzania’s broader operating environment, that have already materialized as weaker profitability and/ or asset quality metrics.

RATIONALE FOR NEGATIVE OUTLOOK
Moody’s assigned a negative outlook to the long-term ratings of NMB Bank and CRDB Bank reflecting the negative outlook on the Government of Tanzania’s newly assigned B1 rating. Tanzania’s negative outlook indicates that the balance of risks to the country’s credit profile are tilted to the downside due to an increasingly unpredictable policy environment, weighing on the business climate. Uncertainty over the regulatory environment and policy stance of the government, particularly as it relates to the mining sector, could have a long-term negative impact on the country’s growth potential and ability to attract foreign investment.

For NMB Bank, the negative outlook captures the strong interlinks between its own standalone creditworthiness and the credit profile of the sovereign, given its holdings of sovereign debt securities. For CRDB Bank, its local currency deposit rating benefits from a one-notch of systemic uplift and the negative outlook reflects Tanzania’s government potentially weakening capacity to support CRDB Bank, in case of need.

ISSUER-SPECIFIC RATING DRIVERS
NMB BANK PLC
Moody’s decision to affirm NMB Bank’s ratings reflects its (1) solid capitalisation, with a tangible common equity-to-assets ratio of around 14.5% as of year-end 2017, (2) strong liquidity buffers, with liquid assets at 41% of tangible assets as of year-end 2017, alongside a retail deposit-funded profile that is supported by a strong domestic franchise, and (3) beneficial association with Rabobank (Aa2 long-term bank deposits, negative outlook, a2 BCA), which supports the bank’s management, technical and operational expertise.

These credit strengths are balanced against NMB Bank’s weakened asset quality and profitability profile, in the context of recent challenges in Tanzania’s operating conditions. NMB Bank’s problem loans deteriorated to 6.4% of gross loans as of year-end 2017, from 4.8% as of year-end 2016. As a consequence of higher loan loss provisioning needs the bank’s net income/ tangible assets dropped to 1.8% during 2017, from 3.3% during 2016. While we expect pressure to gradually ease, credit conditions have been impacted by (1) large scale layoffs of government employees; and (2) lower margins and tighter liquidity for the country’s corporates, following higher tax payments, government payment delays and government austerity measures.

NMB Bank’s B1/ Not Prime long and short-term local-currency deposit ratings capture the bank’s b1 BCA. The bank’s B1 deposit rating does not benefit from any uplift because its BCA is already at the same level as the government’s B1 rating.

The B2/ Not Prime foreign-currency long and short-term deposit ratings of NMB Bank are constrained by Tanzania’s country ceiling for such foreign-currency deposits, which captures foreign-currency transfer and convertibility risks.

The negative outlook on the bank’s long-term deposit ratings captures the negative outlook assigned to Tanzania’s newly assigned B1 rating. NMB Bank’s high exposure to government debt links its credit profile to that of the government, leading the bank’s standalone credit profile and ratings being constrained by the rating of the government. The bank’s sovereign exposure is mainly in the form of government debt securities at 1x its tangible common equity as of year-end 2017.

NMB Bank’s CR Assessment is positioned at Ba3(cr)/ Not-Prime(cr), one notch above the bank’s b1 Adjusted BCA, reflecting Moody’s view that its probability of default is lower than that of deposits.

Year-end 2017 figures are based on the bank’s unconsolidated unaudited financial statements, which are under local regulatory accounting standards.

CRDB Bank Plc
CRDB Bank’s B1/ Not Prime local-currency long and short-term deposit ratings, capture the bank’s b2 BCA and a one notch uplift systemic support uplift, reflecting Moody’s view of a very high probability of government support, in case of need. Moody’s decision to affirm these ratings reflects CRDB Bank’s (1) solid liquidity buffers, with liquid assets at 43% of tangible assets as of year-end 2017, (2) deposit-based funding profile, supported by a strong domestic franchise and an extensive distribution network, and (3) capital buffers, with a tangible common equity of around 12.6% of assets as of year-end 2017.

At the same time, these strengths are balanced against CRDB Bank’s (1) high problem loans at 13.6% of gross loans as of year-end 2017, down from 14.6% as of end-September 2017, yet still above the 6.2% global median for b2-rated banks; and (2) weakened profitability with pre-provision income at 3.7% of average assets during 2017, down from 4.3% during 2016. While we expect pressure to gradually ease, credit conditions have recently been affected by lower margins and tighter liquidity for the country’s corporates, following higher tax payments, government payment delays and government austerity measures.

The B2/ Not Prime foreign-currency long and short-term deposit ratings of CRDB Bank are constrained by Tanzania’s country ceiling for such foreign-currency deposits, which captures foreign-currency transfer and convertibility risks.

The negative outlook assigned to the long-term ratings is in line with the negative outlook on Tanzania’s B1 rating. Since CRDB Bank’s B1 long-term local currency deposit rating benefits from a one-notch of systemic uplift, the negative outlook reflects Tanzania’s government potentially weakening capacity to support CRDB Bank, in case of need.

CRDB Bank’s CR Assessment is positioned at B1(cr)/ Not-Prime(cr), one notch above the bank’s b2 Adjusted BCA, reflecting Moody’s view that its probability of default is lower than that of deposits.

Year-end 2017 figures are based on the bank’s unaudited financial statements, which are under local regulatory accounting standards.

WHAT COULD MOVE THE RATINGS UP/DOWN
There is no upward rating momentum in the banks’ long-term deposit ratings, given the negative outlook assigned. The outlook on the ratings may be changed to stable if the outlook on Tanzania’s government ratings is also changed to stable.

Negative pressure could be exerted on the banks’ ratings if there is a deterioration in the overall operating environment leading to a prolonged weakness in the banks’ profitability and asset quality profiles or if there is a downgrade in Tanzania’s sovereign rating.

LIST OF AFFECTED RATINGS
Issuer: CRDB Bank Plc

Affirmations:

….LT Bank Deposits (Local Currency), Affirmed B1, Outlook changed To Negative From Stable

….LT Bank Deposits (Foreign Currency), Affirmed B2, Outlook changed To Negative From Stable

….ST Bank Deposits, Affirmed NP

….Adjusted Baseline Credit Assessment, Affirmed b2

….Baseline Credit Assessment, Affirmed b2

….LT Counterparty Risk Assessment, Affirmed B1(cr)

….ST Counterparty Risk Assessment, Affirmed NP(cr)

Outlook Actions:

….Outlook, Changed To Negative From Stable

Issuer: NMB Bank PLC

Affirmations:

….LT Bank Deposits (Local Currency), Affirmed B1, Outlook changed To Negative From Stable

….LT Bank Deposits (Foreign Currency), Affirmed B2, Outlook changed To Negative From Stable

….ST Bank Deposits, Affirmed NP

….Adjusted Baseline Credit Assessment, Affirmed b1

….Baseline Credit Assessment, Affirmed b1

….LT Counterparty Risk Assessment, Affirmed Ba3(cr)

….ST Counterparty Risk Assessment, Affirmed NP(cr)

Outlook Actions:

….Outlook, Changed To Negative From Stable