In a statement, the London based credit rating agency said the EADB’s credit profile reflects its strong capital and liquidity, balanced against its shareholders' low average credit quality and concentration risks in its loan portfolio.
The research is an update to the markets and does not constitute a rating action, Moody’s said in its annual report dated July 2018. "The bank's credit strengths include strong liquidity and capital buffers that are among the strongest of the multilateral development banks we rate," said Aurelien Mali, a Moody's Vice President and Senior Credit Officer who is also the report's author.
"EADB's main credit weaknesses are its borrowers' low credit quality and the high geographic concentration of its assets," the report stated. Although the bank's level of non-performing loans decreased significantly during its restructuring period from 2009 to 2012 after the NPL ratio climbed to 7.0 percent in 2016 and rose further to 9.1 percent in 2017.
This increase reflects the low average quality of the bank's loan portfolio due to East Africa's difficult operating environment, and the high concentration of its loan book. Moody's expects EADB to remain profitable, supported by the expansion in its investment activities, even though the full provision and write-off of NPLs in 2018 could weaken profitability for the year.
The Moody’s report further noted that Kampala based troubled regional bank has strong liquidity, reinforced by low levels of borrowing relative to liquid assets, moderate funding costs and a relatively long-dated debt maturity structure.
“Poor credit quality constrains the strength of shareholder support for the bank. Its weighted median shareholder rating of B2 in 2017 is among the lowest of all the multilateral development banks that Moody's rates,” it noted.
Returning to a low NPL ratio as the bank continues to expand its balance sheet in the coming years would be credit positive. Additional support from higher-rated shareholders could also result in a positive reassessment of the credit rating, the report added.
In contrast, a further deterioration in asset quality would put downward pressure on the rating. It could also come under pressure if the bank's rapid asset growth were to result in a disproportionate increase in credit risk, undermining recent improvements in governance and risk management.
The regional lender has been in management crisis since 2016 when a group of junior staff and African Development Bank directors sought the removal of its Director General, Vivienne Yeda from Kenya on mismanagement allegations.