Johannesburg, 03 May 2016 — Global Credit Ratings has today assigned national scale ratings to Grindrod Bank Limited of BBB+(ZA) and A2(ZA) in the long and short term respectively; with the outlook accorded as Stable. Furthermore, Global Credit Ratings has assigned an international scale local currency rating of BB to Grindrod Bank Limited; with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Grindrod Bank Limited (“Grindrod Bank” or “the bank”) based on the following key criteria:
The ratings reflect Grindrod Bank’s established and streamlined business model (offering niche banking products and services to private, corporate and institutional clients in South Africa), its sound standalone financial profile, and demonstrated financial support from its parent (Grindrod Limited). The bank’s risk appropriate capitalisation, conservative risk appetite, sound asset quality, and resilient profitability, mitigate to an extent its structural reliance on confidence-sensitive wholesale funding.
The bank is a subsidiary (96.6%) of Grindrod Limited (“the group”), an established freight, shipping and financial services group with operations in South Africa, Africa and Asia. The group had a consolidated capital base of R19.1bn and assets of R40.5bn at FYE15. Grindrod Limited has supported the bank’s R1bn Domestic Medium Term Note (“DMTN”) Programme launched in October 2012 and has issued an irrevocable and unconditional guarantee (as primary obligor and not merely as surety) on issued notes, demonstrating strong financial support. At FYE15, issued notes (R160m) under the DMTN Programme contributed 1.4% (FYE14: 5.5%) of the bank’s total funding liabilities (including equity). The guarantee permits creditors to press claims against the guarantor in the event of default. Furthermore, implicit linkages with the parent, such as shared corporate identity, common management (ie, board membership) and intercompany loans and deposits (although insignificant at 3.4% of total loans and 0.6% of total deposits at FYE15), were also favourably considered.
The bank’s total qualifying/regulatory capital and reserves grew by 21.3% (FYE14: 17.5%) to R847m at FYE15, mainly due to earnings retention (R100m) and growth in preference share capital (R40m). The bank reported a total risk weighted capital adequacy ratio (“CAR”) of 13.5% at FYE15 (FYE14: 13.0%). The CAR was well above the statutory minimum of 10.25%, calculated in line with Basel III capital requirements, as currently applicable in South Africa.
Asset quality remains sound, notwithstanding an increase (25%) in non-performing loans (“NPLs”) in F15 (albeit from a very low base), on the back of a challenging economic environment. The gross NPL ratio increased slightly to 2.1% at FYE15 (FYE14: 2.0%), although partly masked by the 18.2% (FYE14: 18.3%) loan growth. The gross NPL ratio compared favourably to the domestic banking industry average of 3.1% at end-2015. Specific provisions covered 11.1% of NPLs at FYE15 (FYE14: 7.5%), pre-collateral. Provisions plus collateral fully cover arrears. The ratio of NPLs net of provisions to the bank’s capital amounted to 8.4% at FYE15 (FYE14: 8.7%). Note is taken of South Africa’s deteriorating corporate environment, rising interest rate cycle, and subdued global markets, which will continue to negatively affect the bank’s asset quality despite its select clientele and highly collateralised loan book.
Earnings before tax grew by 12.5% to R142.7m in F15 (F14: 13.6%) supported by credit growth and improved net interest margin despite a rise (155%) in loan impairment charges. Overall, the bank’s ROaE and ROaA stood at 20.2% (F14: 20.3%) and 1.2% (F14: 1.1%) respectively for F15. Although the structural makeup of the group’s funding base remains an issue due to the wholesale nature and short maturity structure, direct funding and liquidity risks are partly ameliorated by the high coverage of short dated liabilities by liquid assets at 60.7% as at FYE15 (FYE14: 58%). Furthermore, the bank’s loan to deposit ratio remains conservatively low at 46.8% at FYE15 (FYE14: 50.6%).
Evidence of healthy and stable financial metrics through the economic cycle, an improved funding structure (term/diversification), and enhanced market position and support structure, could lead to upward ratings migration. However, a significant deterioration in the bank’s profitability, asset quality, and liquidity and capital ratios associated with a highly challenging and volatile operating environment and weak credit administration and/or weakening support factors could see ratings come under pressure.
|NATIONAL SCALE RATINGS HISTORY|
|Initial/last rating: First time/New rating|
|Outlook: First time/New rating|
|Primary Analyst||Committee Chairperson|
|Jennifer Mwerenga||Omega Collocott|
|Senior Credit Analyst||Sector Head: Financial Institution Ratings|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2016
South Africa Bank Statistical Bulletin (December 2015)
RATING LIMITATIONS AND DISCLAIMERS
ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.NET/RATINGS-INFO. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.NET.
SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
Grindrod Bank Limited participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit ratings have has been disclosed to Grindrod Bank Limited with no contestation of the ratings.
The information received Grindrod Bank Limited and other reliable third parties to accord the credit rating(s) included:
- Audited financial results of the bank at 31 December 2015 (plus four years of comparative numbers);
- Unaudited management accounts of the bank as at 29 February 2016
- Corporate governance and enterprise risk framework;
- Reserving methodologies and capital management policy;
- Industry comparative data and regulatory framework; and
- A breakdown of facilities available and related counterparties.
The ratings above were solicited by, or on behalf of, Grindrod Bank Limited, and therefore, GCR has been compensated for the provision of the ratings.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S FINANCIAL INSTITUTIONS GLOSSARY
|Arrears||An overdue debt, liability or obligation. An account is said to be ‘in arrears’ if one or more payments have been missed in transactions where regular payments are contractually required.|
|Asset||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|Asset Quality||Refers primarily to the credit quality of a bank’s earning assets, the bulk of which comprises its loan portfolio, but will also include its investment portfolio as well as off balance sheet items. Quality in this context means the degree to which the loans that the bank has extended are performing (ie, being paid back in accordance with their terms) and the likelihood that they will continue to perform.|
|Basel||Basel Committee on Banking Supervision housed at the Bank for International Settlements.|
|Basel I||Basel Committee regulations, which set out the minimum capital requirements of financial institutions with the goal of minimising credit risk.|
|Capital||The sum of money that is invested to generate proceeds.|
|Capital Adequacy||A measure of the adequacy of an entity’s capital resources in relation to its current liabilities and also in relation to the risks associated with its assets. An appropriate level of capital adequacy ensures that the entity has sufficient capital to support its activities and that its net worth is sufficient to absorb adverse changes in the value of its assets without becoming insolvent.|
|Capital Base||The issued capital of a company, plus reserves and retained profits.|
|Collateral||Asset provided to a creditor as security for a loan.|
|Default||Failure to meet the payment obligation of either interest or principal on a debt or bond. Technically, a borrower does not default, the initiative comes from the lender who declares that the borrower is in default.|
|Equity||Equity (or shareholders’ funds) is the holding or stake that shareholders have in a company. Equity capital is raised by the issue of new shares or by retaining profit.|
|Guarantee||An undertaking in writing by one person (the guarantor) given to another, usually a bank (the creditor) to be answerable for the debt of a third person (the debtor) to the creditor, upon default of the debtor.|
|Impairment||Reduction in the value of an asset because the asset is no longer expected to generate the same benefits, as determined by the company through periodic assessments.|
|Interest||Scheduled payments made to a creditor in return for the use of borrowed money. The size of the payments will be determined by the interest rate, the amount borrowed or principal and the duration of the loan.|
|Interest Rate||The charge or the return on an asset or debt expressed as a percentage of the price or size of the asset or debt. It is usually expressed on an annual basis.|
|International Scale Rating LC||International local currency (International LC) ratings measure the likelihood of repayment in the currency of the jurisdiction in which the issuer is domiciled. Therefore, the rating does not take into account the possibility that it will not be able to convert local currency into foreign currency or make transfers between sovereign jurisdictions.|
|Liabilities||All financial claims, debts or potential losses incurred by an individual or an organisation.|
|Liquid Assets||Assets, generally of a short term, that can be converted into cash.|
|Liquidity||The speed at which assets can be converted to cash. It can also refer to the ability of a company to service its debt obligations due to the presence of liquid assets such as cash and its equivalents. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price.|
|Liquidity Risk||The risk that a company may not be able to meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets. Regarding securities, the risk that a financial instrument cannot be traded at its market price due to the size, structure or efficiency of the market.|
|Long-Term||Not current; ordinarily more than one year.|
|Long-Term Rating||Reflects an issuer’s ability to meet its financial obligations over the following three to five year period, including interest payments and debt redemptions. This encompasses an evaluation of the organisation’s current financial position, as well as how the position may change in the future with regard to meeting longer term financial obligations.|
|Margin||The rate taken by the lender over the cost of funds, which effectively represents the entity’s profit and remuneration for taking the risk of the loan; also known as spread.|
|Maturity||The length of time between the issue of a bond or other security and the date on which it becomes payable in full.|
|Net Interest Margin||Net interest income divided by average interest earning assets. Measures a bank’s margin after paying funding sources and how successful a bank’s interest-related operations are.|
|Performing Loan||A loan is said to be performing if the borrower is paying the interest on it on a timely basis.|
|Preference Share||Preference or preferred shares entitle a holder to a first claim on any dividend paid by the company before payment is made on ordinary shares. Such dividends are normally linked to an interest rate and not determined by company profits. Preference shares are normally repayable at par value in the event of liquidation. They do not usually carry voting or pre-emptive rights. Preference shares can be redeemable or perpetual.|
|Provision||The amount set aside or deducted from operating income to cover expected or identified loan losses.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Short-Term||Current; ordinarily less than one year.|
|Short-Term Rating||An opinion of an issuer’s ability to meet all financial obligations over the upcoming 12 month period, including interest payments and debt redemptions.|
For a detailed glossary of terms utilised in this announcement please click here
GCR accords an initial rating of BBB+(ZA) to Grindrod Bank Limited; Outlook Stable.