MOODY'S ASSIGNS FIRST-TIME RATINGS TO CRDB BANK PLC

Global Credit Research - 16 Aug 2016
Local currency deposit rating of B1 with stable outlook
Limassol, August 16, 2016 -- Moody's Investors Service has today assigned first time ratings to CRDB Bank Plc: B1 local currency deposit ratings; B2 foreign currency deposit ratings; and a b2 baseline credit assessment (BCA) and adjusted BCA. The outlook on the deposit ratings is stable. Moody's also assigned a Counterparty Risk Assessment (CR Assessment) of B1(cr).

Moody's methodology starts with an assessment of a bank's operating environment, which the rating agency views as challenging, as implied by Tanzania's macro profile score of 'Very Weak +'. Within this context, CRDB Bank's ratings reflect its (1) leading domestic franchise, characterized by an extensive distribution network and diversified deposit-based funding profile, which has sustained strong profitability and healthy liquidity buffers while positioning the bank well to take advantage of Tanzania's growth potential; (2) elevated asset quality risks going forward, which pose the challenge of compounding already high non-performing loans (NPLs) and fairly low provisioning coverage; (3) capital buffers that provide a good cushion against additional unexpected losses; and (4) our view of a 'very high' likelihood of government support, in case of need.

The stable outlook balances the bank's elevated credit risks against its strong loss absorbing buffers in terms of profitability and capital.

A full list of assigned ratings and rating inputs can be found at the end of this press release.

RATINGS RATIONALE

TANZANIA'S MACRO PROFILE

Moody's methodology starts with an assessment of CRDB Bank's operating environment, which is based on the rating agency's assessment of Tanzania's macro profile, where the bank conducts most of its business.

Moody's assigns a 'Very Weak +' macro profile score to Tanzania. Tanzania's macro profile captures the country's rapidly expanding and fairly diversified economy, and low susceptibility to event risk, while Tanzanian banks benefit from a supply of stable, low-cost customer deposits and healthy liquidity buffers, which support their financial stability. These strengths are, however, balanced against the relatively low wealth levels and low institutional capacity according to global governance indicators. Tanzania's macro profile score also incorporates Moody's assessment that credit conditions are weakened by a rising level of debt to disposable income (in the formal sector) and the weak structuring of loans, in particular the prevalence of working capital facilities to finance long-term financing needs. For more details on Tanzania's macro profile, please refer to www.moodys.com.

DEPOSIT BASED FUNDING PROFILE WITH HEALTHY LIQUIDITY METRICS

Moody's expect CRDB Bank to maintain its leading, deposit-funded domestic franchise over the next few years supported by its increasing focus on retail banking and alternative distribution channels. Despite an increase in market funding to 13% of tangible banking assets as of March 2016, the bank's reliance on market funding remains lower than peers, with a 17% global median for b2 rated banks. CRDB Bank also maintains healthy liquidity levels. As of end March 2016, Moody's estimates liquid assets (cash, central bank, interbank balances, and investments) at around 32% of tangible banking assets, compared to 30% for the median of b2-rated global peers.

Our assessment of CRDB Bank's funding profile balances its strong deposit franchise against vulnerabilities stemming from systemic issues such as (1) the high dollarisation ratio (and the central bank's limited capacity to act as lender of last resort in foreign currency); and (2) asset-liability maturity mismatches, given the short-term nature of most deposits. While tighter funding and liquidity conditions (affecting the overall banking system) increased the bank's market funding (as reliance on central bank reverse repo increased) and lead to a one-off drop in deposits, Moody's expects improved funding conditions and deposit growth going forward. Tighter liquidity recently was caused by (1) authorities stringent monetary policies, and (2) the withdrawal of deposits by various government agencies.

HIGH ASSET RISK AMID INCREASED NPL LEVELS AND LOW PROVISIONING COVERAGE

CRDB Bank's high asset risk is a credit weakness, given high NPLs and a low provisioning coverage. As per IFRS standards NPLs-to-gross loans stood at 8.1% as of end-2015 (end-2014: 5.0%), above the 5.8% global median for b2 rated banks. Loan loss reserves provide a thin cover for NPLs at just 30% of problem loans as of December 2015 (around 70% including the additional provisions held in a regulatory banking risk reserve and general banking reserve).

Going forward, Moody's expects a drop in the NPL ratio, supported by improvements in the conditions of many of CRDB Bank's largest problematic borrowers, but to remain elevated compared to global peers given (1) the high loan growth (gross loans grew 30% in 2015 and an additional 8% during the first quarter of 2016, Q1 2016); (2) weaknesses in the structuring of loans facilities, whereby a large proportion of overdraft loans are used for longer-term financing needs (overdraft loans accounted for around 24% of total as of end-2015); and (3) CRDB Bank's fairly high percentage of loans to the problematic agriculture sector at 18% as of end 2015, although down from 24% as of end-2012 (there is inherent volatility in the agricultural sector amid dependence on commodity prices, weather conditions and the limited commercialisation of the sector).

Positively, CRDB Bank has been increasingly focusing on the more granular and diversified consumer segment over the past few years. CRDB Bank now has a fairly diversified loan book across economic sectors and increasingly diversified across segments, which has reduced its concentration to the corporate, in general (corporate loans dropped to 55% of total loans as of end-2015, from 70% as of end-2012), and to the country's largest corporates, in particular.

CAPITAL BUFFERS PARTLY MITIGATE ASSET QUALITY RISKS

Moody's expects the bank's capital to remain broadly at the current levels, as strong profitability (that leads to internal capital generation) balances the increase risk-weighted assets in the next 12-18 months. The bank's capital buffers support the bank's solvency position and overall rating. CRDB Bank's tangible common equity (TCE) stood at 15.0% of adjusted risk-weighted assets, compared to a 13.5% global median for b2 rated banks, and its adjusted Tier 1 ratio of 11.7% (regulatory Tier 1 ratio of around 14.1% vs. a 12.5% regulatory minimum), compared to an 11.9% global median for b2 rated banks. Moody's applies its standard adjustments whereby it risk-weights government securities at 100%.

STRONG PROFITABILITY METRICS SUPPORTED BY A LEADING DOMESTIC FRANCHISE
Moody's expects CRDB Bank's profitability metrics to remain a credit strength, supported by its leading domestic franchise and recent strategic initiatives. CRDB Bank is well placed to benefit from Tanzania's strong medium-term growth potential by leveraging on its strong franchise as Tanzania's largest corporate bank, with domestic market shares of around 18%-21% in terms of assets, loans and deposits and one of the country's largest branch network with 217 branches as of March 2016. During 2015, CRDB Bank's pre-provision income stood at 5.3% of average assets and net income at 2.7% of average assets, which are high by global standards.

With the bank recently investing heavily on its branch and alternative distribution network and IT infrastructure, it is now focusing on leveraging its increased footprint by increasing the usage of its alternative banking channels, growing in the retail and SME segments and realising enhanced productivity and operational efficiency. In addition, the bank is looking to gain more market share in the government related business, which will allow it to enhance its presence and cross-sell to government employees. As a consequence, Moody's expects profitability to remain supported by strong margins and continued improvements in operational efficiency. The cost-to-income ratio stood at 55% during 2015, down from 60% during 2014.

A VERY HIGH PROBABILITY OF GOVERNMENT SUPPORT
CRDB Bank's B1 deposit rating is based on (1) a baseline credit assessment of b2, and (2) our view of a 'very high' likelihood of government support in the event of a stress.

Moody's view is based on (1) authorities track record of supporting banks in times of stress, and (2) CRDB Bank's systemic importance as the largest bank in Tanzania (with market shares of around 18%-21% in terms of domestic loans/ deposits/ assets).

RATING OUTLOOK

The outlook on CRDB Bank's ratings is stable. The stable outlook balances the elevated credit risks against the bank's strong loss absorbing buffers in terms of profitability and capital.

COUNTERPARTY RISK ASSESSMENT

CRDB Bank's CR Assessment is positioned at B1(cr), one notch above the adjusted baseline assessment of b2 and therefore in line with the local currency deposit ratings. CR Assessments are opinions of how counterparty obligations are likely to be treated if a bank fails and relates to a bank's contractual performance obligations (servicing), derivatives (e.g., swaps), letters of credit, guarantees and liquidity facilities. Senior obligations represented by the CR Assessment will be more likely preserved in order to limit contagion, minimise losses and avoid disruption of critical functions.

FOREIGN CURRENCY DEPOSIT RATINGS

Moody's assigned to CRDB Bank a foreign-currency deposit rating of B2/Not-Prime, which is constrained at a lower level.

WHAT COULD MOVE THE RATING -- UP/DOWN

Positive pressure could be exerted on CRDB Bank's ratings if Moody's believes there is an improvement in the country's macro profile or if there is a material reduction in the bank's NPLs and a strengthening in its provisioning coverage.

Negative pressure could be exerted on CRDB Bank's ratings if NPLs deteriorate further, which may lead to a material weakening in the bank's profitability and capital metrics. The bank's ratings would also be under pressure if the credit profile of the sovereign (its support provider) were to weaken.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks published in January 2016. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

LIST OF ASSIGNED RATINGS AND RATINGS UNPUTS

The following ratings and ratings inputs were assigned to CRDB Bank for the first time:

- Long-term local currency deposit ratings at B1, with stable outlook

- Long-term foreign currency deposit ratings at B2, with stable outlook

- Short-term deposit ratings (local and foreign currency) at Not-Prime

- Long and short-term Counterparty Risk Assessment at B1(cr) / Not-Prime(cr)

- Baseline credit assessment at b2

- Adjusted baseline credit assessment at b2

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.


For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Christos Theofilou, CFA
Asst Vice President - Analyst
Financial Institutions Group
Moody's Investors Service Cyprus Ltd.
Porto Bello Building
1, Siafi Street, 3042 Limassol
PO Box 53205
Limassol CY 3301
Cyprus
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Sean Marion
Managing Director
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Cyprus Ltd.
Porto Bello Building
1, Siafi Street, 3042 Limassol
PO Box 53205
Limassol CY 3301
Cyprus
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454