BRD’s strategy is directly aligned with Rwanda’s economic transformation plan (National Strategy for Transformation).
Fitch Ratings has assigned Development Bank of Rwanda (BRD) a Long-Term Issuer Default Rating (IDR) of ‘B+’ with a Stable Outlook.
Fitch has also assigned BRD a Support Rating Floor (SRF) of ‘B+’ and Support Rating (SR) of ‘4’.
According to a statement from Fitch Ratings, the Long-Term IDR and SRF of the state-owned policy bank, BRD, are equalised with Rwanda’s sovereign rating (B+/Stable). It said that the Stable Outlook on BRD’s Long-Term IDR mirrors that on the sovereign rating.
“BRD’s ratings reflect Fitch’s view of the Rwandan authorities’ high propensity to provide extraordinary support to the bank, if required, as well as its limited ability to do so, in particular in foreign currency as indicated by the sovereign’s Long-Term Foreign-Currency IDR,” the statement reads in part.
Fitch’s view of the sovereign support reflects BRD‘s state-ownership and its important and clearly defined policy role in financing the country’s priority sectors as part of its development mandate.
BRD is Rwanda’s sole development bank and its unique business model would be difficult to replicate by other domestic financial institutions.
The bank is 97%-owned by the government, via the Agaciro Development Fund (Rwanda’s sovereign wealth fund, 55%) and the Rwanda Social Security Board (42%) and is overseen by the Ministry of Finance.
Sovereign support available to BRD also includes a track record of capital injections in recent years, which strengthen BRD‘s ability to deliver on its ambitious developmental objectives.
BRD is supervised by Rwanda’s Central Bank, the National Bank of Rwanda, and subject to compliance with the prudential requirements, albeit with certain exemptions (in particular for asset quality, loan restructuring and FX risk management).
A government-led transformation of BRD initiated in 2016 has strengthened the bank and contributed to its improving financial profile.
Achieving financial sustainability is a key objective for the authorities as the bank resumes lending and fulfils its policy objectives.
BRD reported profits in 9M19 owing to improving asset quality (impaired loan ratio of 10.4% at end-3Q19, down from 22.3% at end-2018) after several years of losses. BRD‘s performance continues to be dragged down by relatively high funding costs and large FX translation losses due to its unhedged foreign currency funding.
BRD‘s cost to income ratio remains high (9M19: 87%), although improving on the back of ongoing business reorganisation.
Like all policy banks, BRD has a higher risk appetite and finances emerging industry sectors and customers that commercial banks view as too risky.
Lending is typically longer term (average tenor in the book is 84 months) and on preferential terms, including favourable terms and long grace periods.
BRD is entirely reliant on wholesale funding, including long-term funding from multilateral development financial institutions and Rwandan government agencies, and grants.
The government does not extend funding guarantees, but this has not affected BRD‘s funding profile so far. However, it does affect its funding costs.
BRD receives annual capital contributions from the state to fulfil its mandate. Capitalisation metrics are healthy, with a tangible common equity/tangible assets ratio of 25.4% at end-3Q19.
The two main state-related shareholders increased BRD‘s share capital in 2018 by Rwf 31.8 billion (equivalent to US$34 million).
“We believe that BRD‘s capital increase will be completed according to schedule,” Fitch Ratings said.
As is usual for development banks, Fitch does not assign a Viability Rating to BRD. This is because its business model depends on state support and, in our view, its unique policy role cannot be carried out on a commercial basis.
IDRs, Support Rating and Support Rating Floor
Factors that could, individually or collectively, lead to negative rating action/downgrade:
The most immediate downside rating sensitivity for BRD‘s IDRs, Support Rating and SRF would be a downgrade of Rwanda’s sovereign ratings. BRD‘s ratings are also sensitive to a reduced propensity of the authorities to support the bank.
This could be indicated by a change in BRD‘s policy role, such as a shift into commercial activities, or a material reduction in government ownership. Our assessment is that this is unlikely over the rating horizon.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Upside ratings potential is currently limited. The most immediate upside rating sensitivity for BRD‘s IDRs, SRF and SR would be an upgrade of Rwanda’s sovereign ratings.
Best/Worst Case Rating Scenario
International scale credit ratings of financial institutions issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years.
The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’.
Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings.