BoA rating downgraded on profit drop and bad loans

Bank of Africa has received a negative future outlook rating following a profit drop, loss of market share and a ballooning portfolio of bad loans.

South African rating agency GCR downgraded the outlook of the Moroccan-owned mid-sized lender from stable to negative in its latest credit rating report.

“The negative outlook reflects a diminished relative market position and weakened financial profile in terms of profitability and asset quality (most notably the fast pace at which loans transition through the arrears buckets),” said GCR in the report released late last week.

In the six months to June Bank of Africa (BoA) posted an 82 per cent drop in profit to Sh55 million compared to Sh307 million in the previous half year.

In December last year the lender reported an 80.9 per cent drop in full-year profit at Sh144 million compared to Sh755 million the previous year, curving a downward trend.

Data from Central Bank of Kenya shows that BoA market share held at 1.77 per cent last year, the same as in 2013, but down from 1.83 per cent in 2012. The bank said it was working on strengthening its position in the retail market to beat the negative outlook.

“To improve on profitability and market share, the bank has continued with its focus on the retail sector and investment in branch expansion. We expect to open an additional eight branches by year end,” said the bank in an email response to the Business Daily.

The lender currently has 36 branches.

The bank also said it was aggressively seeking cheap customer deposits. It is currently running a promotion targeting new account holders who deposit more than Sh20,000.

The rating agency, approved by the CMA to assess the credit worthiness of Kenyan companies, was concerned with the growth of non-performing loans. BoA had Sh2.8 billion in bad loans as at June, more than double the Sh1.2 billion held in June last year.

“GCR expects BoA Kenya’s credit profile to remain vulnerable to loan deterioration, given the higher interest rate environment, and the rise in past due but not impaired loans,” said GCR.

There were also concerns over the adequacy of the loan provisions. Bank of Africa, however, said its provisions were sufficient.

“The bank, as at June with a coverage ratio of 80 per cent, has adequate provisions to cover its non-performing loans. We booked additional significant loan provisions in the first half of 2015 which contributed to the bank’s reduced profitability,” it said.

Majority shareholders, BMCE Bank of Morocco, have continued to demonstrate confidence in the Kenyan unit with additional capital injection of Sh1.7 billion in the first half of the year accompanied by a Sh1.3 billion subordinated loan.

GCR retained the short and long term ratings of the bank, A1- and A- respectively, citing the strong shareholder support and regional presence.