Moody’s upgrades regional lender EADB rating on drop in bad loans

Global rating agency Moody’s has upgraded the regional lender East African Development Bank (EADB) after it boosted core capital and reduced non-performing loans.

The bank was upgraded to Baa3, which carries a stable outlook, from the weaker Ba1 issued in 2013.

By the end of last year, paid-up capital of the lender stood at Sh17 billion ($173 million) that was 14 per cent higher than the previous year. The amount was a 73 per cent increase compared to December 2012.

“The main reasons for EADB’s upgrade to Baa3 are: A significant improvement in the capital buffer due to a material increase in paid-in capital by the shareholders and a sharp decline in non-performing loans as a result of the bank’s sustained efforts to restructure its balance sheet,” Moody’s said in a statement.

Growth in the profitability of the bank has also helped prop up its capital.

The bank’s capital position has risen so substantially since 2008 that the total usable equity is able to cover its investment portfolio, which represents nearly triple (192 per cent) the sum of outstanding gross loans and equity investments.

In 2007, EADB capital only covered 37 per cent of the total assets.

The current capital level means that the ratio of shareholders’ funds to total assets created by the multilateral development bank is such that it has a big room to lend more and increase assets.

“This (192 per cent) is one of the highest equity-to-assets ratio in Moody’s multilateral development banks rating universe. As a comparison, PTA Bank and Shelter Afrique had ratios of 25 per cent and 61 per cent respectively in 2013. Rising profitability has also supported EADB’s capital position,” said Moody’s in the statement.

The EADB has reduced non-performing loans (NPLs) sharply to 1.4 per cent as at the end of last year compared to 32 per cent in 2010.

“The sharp reduction in NPLs reflects debt restructuring, loan write-offs and enhancements in the bank’s risk-management procedures,” said the rating agency.

The rating could go up, Moody’s said, if the there is a continued growth in profitability while retaining low levels of NPLs.

“A continued rise in profitability alongside the maintenance of low NPL levels while the bank expands its balance sheet in the coming years could exert upward pressure on the rating. Maintaining strong capital adequacy relative to risk assets would also be credit-positive,” said the rating firm.

Things could also go south for the bank in terms of rating if it faces deterioration in NPLs if the bank’s assets grow very fast.

EADB owners include Kenya, Rwanda, Tanzania and Uganda.

Rwanda and Burundi were admitted to the EAC on November 30, 2006. In 2007, Kigali requested to join the EADB and was granted the wish in 2008. Uganda, Kenya and Tanzania are principal shareholders of the bank.

The other shareholders are development institutions including African Development Bank (AfDB).