Announcements Financial Institutions Rating Alerts

GCR affirms ABC Holdings’ national scale rating of B(BW); maintains Rating Watch Evolving.

Rating Action

Johannesburg, 8th November 2019 – GCR Ratings (‘GCR’) has affirmed ABC Holdings Limited’s (“ABCH”, “the group”) long and short-term Botswanan national scale ratings of B(BW)/B(BW). The Rating Watch Evolving on both ratings has been maintained.

Rated Entity / Issue

Rating class

Rating scale

Rating

Outlook / Watch

ABC Holdings Limited

Issuer Long Term

National

B(BW)

Rating Watch Evolving

Issuer Short Term

National

B(BW)

Rating Watch Evolving

On May 22, 2019 GCR announced that it had released new criteria for all banks and bank-like entities. This methodology is titled Criteria for Rating Financial Institutions. As a result, the ratings were placed “Under Criteria Observation”.

Subsequently, on August 5 2019, GCR placed ABCH’s long and short-term national scale ratings of B(BW)/B(BW) on Ratings Watch Evolving in response to the announced, impending restructure of ABCH involving an equity swap transaction with Kenya-based Equity Group Holdings Plc (“EGH”). GCR has now finalised the review of ABCH’s ratings under the new methodology to the ratings above stated.

Rating Rationale

ABCH’s national scale long-term issuer rating of B(BW) balances the group’s somewhat moderate operating environment and adequate risk position with its modest franchise strength, low capitalisation and modest liquidity. The Ratings Watch Evolving reflects our uncertainty about the impact that would result from the group disposing of three of its subsidiaries.

Atlas Mara (“ATMA”), the holding company for ABCH, intends to dispose of the group’s BancABC Mozambique, BancABC Tanzania and Atlas Mara Zambia subsidiaries for an equity stake in EGH. Consequently, these subsidiaries were deconsolidated effective 30 April 2019 and were reclassified as a disposal group held-for-sale. We think that ABCH’s profile, post transaction, will more closely resemble that of BancABC Botswana, the group’s flagship, and to a lesser extent, BancABC Zimbabwe’s, as the two remaining subsidiaries of the group. In this regard, the reduction in ABCH’s exposure to countries with inherently weaker operating environments is viewed positively. Nonetheless, the group’s exposure to the Zimbabwean weak operating environment still poses a sizeable risk to ABCH’s overall operating environment should Zimbabwe’s persisting economic challenges worsen.

The group’s franchise strength is viewed to be modest, reflected the mid-tier positions occupied by its subsidiaries in Botswana and Zimbabwe. Less positively, geographical diversification for the group’s operations is diminished due to the disposal of some of its subsidiaries.

ABCH registered negative common equity tier 1 capital of -$8.5m at FY18 mainly due to foreign currency translation losses that arose from the introduction of a local currency in Zimbabwe and its subsequent devaluation. Consequently, total assets in Zimbabwe shrunk by 59% in USD terms. An ATMA loan of $89.0m was converted into cumulative non-redeemable shares in May 2019 to recapitalise ABCH, albeit partially offset by an impairment loss recognised by the group on the sale of subsidiaries. While the GCR capital ratio reversed from negative following recapitalisation to register at 11% at 1H19 (FY18: -2%), the group’s capitalisation is considered to be low. Our view is premised on ABCH’s weak internal capital generation and negative common equity tier 1 capital. However, we are expecting significant improvements in group capitalisation post transaction.

ABCH’s risk profile is considered to be neutral post deconsolidation. The group’s non-performing loans ratio decreased from 12% at FY18 to 5% at 1H19, while credit losses were contained at 0.1%. However, IFRS had a material impact on the provision requirements of the bank. Positively, we now view loan loss provisioning of 135% at 1H19 (FY18: 85%) to be adequate and we expect this to be sustained over the rating horizon. However, we perceive elevated operational risk for the group emanating from the classification of the subsidiaries to be disposed of as discontinued operations, though they are still technically part of the group until the equity swap deal is concluded. The group also registered a short foreign currency position at FY18, which does raise risk in a USD appreciation cycle.

The group’s funding and liquidity is considered to be ratings negative. Concentrations within the funding structure are considered to be moderate, with the top 20 depositors contributing 37% to total customer deposits at FY18. However, the majority of the top 20 deposits were from financial institutions and pension funds which are considered to be less stable than retail deposits. A decrease in ABCH’s cost of funds to 3.4% is noted at 1H19 (FY18: 5.1%), and is attributable to the deconsolidation of the group’s subsidiaries, which typically rely on expensive sources of funding. Liquidity is viewed to be modest, reflected by a GCR liquid assets to customer deposits ratio of 21% at 1H19 (FY18: 43%).

ABCH’s rating of B(BW) reflects the wider group’s strengths and weaknesses coupled with the inherent structural subordination and high double leverage of 2.9x of the non-operating holding company.

Rating Outlook

The Rating Watch Evolving reflects our uncertainty about the impact that would result from the group disposing of three of its subsidiaries. We expect to resolve the ratings watch within the next six months, when we have more certainty regarding the transaction and its impact on the group. However, we have factored in improved country and sector risk score, as well as an improvement in group capitalisation.

Rating Triggers

Upside ratings potential could result from improved and sustained core equity and stronger liquidity. Further deterioration in capital and liquidity could result in negative rating action.

Furthermore, the impact from the equity swap deal could result in either positive or negative rating action, depending on its impact on the group.

Analytical Contacts

Primary analyst

Nyasha Chikwengo

Financial Institutions Analyst

Johannesburg, ZA

NyashaC@GCRratings.com

+27 11 784 1771

     

Committee chair

Matthew Pirnie

Sector Head: Financial Institutions

Johannesburg, ZA

MatthewP@GCRratings.com

+27 11 784 1771

Related Criteria and Research

Criteria for the GCR Ratings Framework, May 2019

Criteria for Rating Financial Institutions, May 2019

GCR Ratings Scale, Symbols & Definitions, May 2019

GCR Country Risk Scores, June 2019

GCR Financial Institutions Sector Risk Score, July 2019

LT & ST national scale ratings of ABC Holdings & BancABC Botswana placed on Rating Watch Evolving, 5 August 2019

Ratings History

ABC Holdings Limited

Rating class

Review

Rating scale

Rating class

Outlook

Date

Issuer Long Term

Initial

National

BBB-(BW)

Negative

December 2004

Last

National

B(BW)

Rating Watch Evolving

August 2019

Issuer Short Term

Initial

National

A3(BW)

N/A

December 2004

Last

National

B(BW)

Rating Watch Evolving

August 2019

Risk Score Summary

Risk score

 
 

Operating environment

12.50

Country risk score

7.50

Sector risk score

5.00

   

Business profile

-1.00

Competitive position

-1.00

Management and governance

0.00

 

Financial profile

-1.50

Capital and Leverage

-1.00

Risk

0.00

Funding structure and Liquidity

-0.50

   

Comparative profile

-2.00

Group support

-2.00

Peer analysis

0.00

   

Total Score

8.00

National scale rating

B(BW)/B(BW)

Glossary

Capital

The sum of money that is invested to generate proceeds.

Cash

Funds that can be readily spent or used to meet current obligations.

Cash Flow

The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.

Credit Rating

An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.

Debt

An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.

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. 

Salient Points of Accorded Ratings

GCR affirms that a.) no part of the ratings were influenced by any other business activities of the credit rating agency; b.) the ratings were 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.

The credit rating has been disclosed to ABC Holdings Limited. The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings.

ABC Holdings Limited participated in the rating process via written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information used to analyse ABC Holdings Limited and accord the credit ratings included:

  • Unaudited financial results as at 30 June 2019
  • Audited financial statements as at 31 December 2018
  • Banking sector information
  • Industry comparative data; and
  • Other publicly available information.



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