Afreximbank Gets GCR’s “A-” Rating With Positive Outlook

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7 July 2021 – GCR Ratings (GCR) has affirmed African Export-Import Bank’s (Afreximbank) international scale long term and short term issuer ratings of A- and A2, respectively, with the outlook placed on Positive. GCR has also affirmed the international scale long term issue rating on the Bank’s USD5bln GMTN programme of A-, with a Positive Outlook.

At the same time, the following national scale long term and short-term issuer ratings have been affirmed:

  • Botswanan National Scale at AAA(BW)/A1+(BW), with outlook accorded as Stable.
  • Cote’ D’Ivoire National Scale at AAA(CI)/A1+(CI), with outlook accorded as Stable.
  • Egyptian National Scale at AAA(EG)/A1+(EG), with outlook accorded as Stable.
  • Ghanaian National Scale at AAA(GH)/A1+(GH), with outlook accorded as Stable.
  • Kenyan National Scale at AAA(KE)/A1+(KE), with outlook accorded as Stable.
  • Mauritian National Scale at AAA(MU)/A1+(MU), with outlook accorded as Stable.
  • Namibian National Scale at AAA(NA)/A1+(NA), with outlook accorded as Stable.
  • Tanzanian National Scale at AAA(TZ)/A1+(TZ), with outlook accorded as Stable.
  • Ugandan National Scale at AAA(UG)/A1+(UG), with outlook accorded as Stable.

Rating Rationale

The ratings on African Export-Import Bank (Afreximbank) reflects the diverse regional membership, strong mandate and track record, demonstrated preferential creditor treatment, beyond adequate capitalisation, strong risk position, diverse funding and robust liquidity.

Afreximbank

The positive outlook factors in our expectation for the status of the Bank as one of the most influential Africa focused Multilateral Development Bank (‘MDBs’) to strengthen, cemented by its development impact on the African continent (measured by the loan book) now closing in on the USD20bln mark.

The outlook also considers the anticipated capital increase of USD1.5bln by shareholders over the next 2 years. The ratings are however constrained by the exposure to high risk operating environments and the relatively weak creditworthiness of its member states.

With development-related exposures of about USD16bln on 31 Dec. 2020, Afreximbank is one of the largest MDBs operating in the African region. The Bank’s geographical mandate exposes the balance sheet to the high and rising operating environment risks of the African continent. We believe these risks continue to rise, reflecting the direct and indirect impact of the COVID-19 pandemic and other exogenous risks.

Furthermore, these same exogenous risks have lowered shareholder creditworthiness. Positively, the sovereign membership base is diverse (on a regional basis) and growing. Our assessment of membership strength is moderated by the Bank’s private sector shareholding. The proven track record of preferred creditor treatment is a rating positive, reflecting the relevance and importance of this institution to its shareholders.

Afreximbank has a very strong status as a trade finance-focused MDB, supported by its size, franchise and impact. Benefiting its status is the track record of countercyclical lending and more recently being the key implementation partner of the African Continental Free Trade Agreement (‘AfCTA’).

With the implementation of AfCTA, Afreximbank is mandated by the African Union (‘AU’) to rollout an Adjustment Facility (USD8bln in value) that is meant to help member countries adjust to the loss of revenue from tariffs. We believe this, alongside the many other initiatives the Bank has undertaken over the last couple of years, will continue to be strong underpin of relevance and importance of this institution to its shareholders.

Capitalisation is ratings positive. The GCR leverage ratio was c.16% at Dec. 2020, down from 19% the prior year driven by the rapid growth of assets. We expect the ratio to bounce back close to 20% over the next 12-18 months, balancing the moderating growth of the loan book and the piecemeal capital increases summing USD1.5bln expected over the next 2 years.

Firm growth in earnings in the region of 24% will also remain supportive of a stronger equity base. We provide uplift for the credit enhancement of the Bank’s capital of USD1bln which mitigates the adverse risks fuelling loan book impairments beyond the threshold deemed unsustainable.

The loan loss reserve coverage was down to c.55%% at Dec. 2020 although over 70% of the loan book is secured with high-quality collateral comprising cash, insurance with at least “A” rated international insurers, and sovereign backed securities.

Asset quality is strong despite strained operating environments. Credit losses were slightly lower at 1% as of Dec. 2020 and compare favourably to rated peers. The pandemic continues to have a marginal impact on loan book performance with recent stress tests reflecting less than 6% of total facilities as vulnerable.

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Asset quality benefits from the strong recovery fundamentals of the loan book. Trade finance facilities are ring-fenced to protect cash flows due to the Bank and the repayment risk profile is low given the transfer of risk to counterparties that have better credit quality and usually are domiciled in developed countries such as the OECD.

Loan concentrations are relatively better in comparison to rated MDBs, with the top 20 exposures accounting for c.66% of the total loan book and c. 3x equity as of Dec 2020. Interest rate risk is adequately managed and any downside risk will likely have contained market impact on the Bank’s profitability as it is hedged. FX lending is moderately low at 12%.

Funding and liquidity factors in a stronger funding structure in comparison to rated peers and strong liquidity profile. Funding sources are well diversified to include regional and global bond issuances, syndicated loans, and central and non-central bank deposits.

Deposits from banks provide a growing source of funds, contributing c.37% of total funding at 31 Dec. 2020. Although fairly short term (6-12 months), these deposits are considered to be stable funding sources due to their behavioural stickiness and the majority of them are asset-backed limiting refinancing risks. Liquidity is strong, reflected by a coverage ratio of 122% as of Dec 2020.

Further liquidity support is derived from the low-risk cash flows from self-liquidating trade finance facilities that have a fairly good amount of cash cover sitting in offshore banks. Due to the shorter weighted average term to maturity of the loan portfolio vs long-term debt profile, a positive asset/liability gap is maintained which is liquidity positive.

We expect the funding and liquidity profile of the Bank to benefit from regular issuance of competitively priced global benchmark bonds in large sizes and longer maturities (as the recently issued) we believe will improve access and stability of funding sources.

We have not factored in callable capital into the ratings because the coverage of debt by A-rated members and insurers was below the required benchmark of 25% (at FY20 it was c.12%).

Outlook Statement

The outlook is positive reflecting our expectation for the status of the Bank to strengthen, cemented by its development impact on the African continent (measured by the loan book) now closing in on the USD20bln mark.

The outlook also considers the anticipated capital increase of USD1.5bln by shareholders over the next 2 years. Alongside the above, our opinion is that the Bank has the capacity to carry out its mandate in light of the pandemic, assisted by a strong balance sheet and support from shareholders which we think remains high.

Furthermore, we expect credit losses to be sustained at low levels, coupled with capital and liquidity managed within adequate to strong levels.

Ratings History – African Export-Import Bank

Rating class Review Rating scale Rating class Outlook Date
Long and Short-Term Issuer Initial International BBB+/A2 Stable February 2017
Last International A-/A2 Stable July 2020
Initial National AAA(EG)/A1+(EG) Stable February 2017
Last National AAA(EG)/A1+(EG) Stable July 2020
Initial National AAA(BW)/A1+(BW) Stable February 2017
Last National AAA(BW)/A1+(BW) Stable July 2020
Initial National AAA(CI)/A1+(CI) Stable February 2017
Last National AAA(CI)/A1+(CI) Stable July 2020
Initial National AAA(GH)/A1+(GH) Stable February 2017
Last National AAA(GH)/A1+(GH) Stable July 2020
Initial National AAA(KE)/A1+(KE) Stable February 2017
Last National AAA(KE)/A1+(KE) Stable July 2020
Initial National AAA(MU)/A1+(MU) Stable February 2017
Last National AAA(MU)/A1+(MU) Stable July 2020
Initial National AAA(NA)/A1+(NA) Stable February 2017
Last National AAA(NA)/A1+(NA) Stable July 2020
Initial National AAA(TZ)/A1+(TZ) Stable February 2017
Last National AAA(TZ)/A1+(TZ) Stable July 2020
Initial National AAA(UG)/A1+(UG) Stable February 2017
Last National AAA(UG)/A1+(UG) Stable July 2020
Long Term Issue Initial International BBB+ Stable June 2017
Last International A- Stable May 2021