Johannesburg, 28 April 2016 — Global Credit Ratings has affirmed the national scale ratings assigned to Absa Bank Limited of AA+(ZA) and A1+(ZA) in the long term and short term respectively; with the outlook accorded as Negative. Furthermore, Global Credit Ratings has affirmed the international scale rating assigned to Absa Bank Limited of BBB; with the outlook accorded as Negative.
SUMMARY RATING RATIONALE
Global Credit Ratings has accorded the above credit ratings to Absa Bank Limited (“Absa”, “the bank”) based on the following key criteria:
The ratings of Absa reflect its sustained robust financial profile, and strong market position (as one of the country’s top four banks), which GCR assesses relative to industry peers. In this regard, Absa’s market shares of total assets, deposits and advances (especially mortgage loans) have moderated over the review period, with five year CAGRs for assets (-3.5%), advances (-3.3%) and deposits (-2.2%) all declining to FYE15. Absa became South Africa’s 3rd largest bank in terms of assets and advances during F14 (2nd largest bank since its formation).
Absa is wholly owned by Barclays Africa Group Limited (“the group”), which in turn is majority owned by Barclays Bank Plc (“the parent”, “Barclays”), and Absa’s ratings have been supported by the parent’s profile and commitment. Barclays’ recent announcement of its intention to sell its controlling stake in the group signals reduced commitment, and Absa’s limited ongoing strategic relevance to Barclays. Nevertheless, while Barclays is still the group’s owner, an element of support is factored into the ratings. Uncertainty over future ownership of other group subsidiaries, and the group’s strategic direction introduces further uncertainty regarding Absa’s strategy and support environment.
Absa’s capital adequacy ratio (13.6% at FYE15) remains above the board’s upper target (13.5%) and the regulatory minimum requirement (10%). However, the bank’s capitalisation metrics have declined over the past three years (following sizeable dividend declarations and asset growth), resulting in Absa’s capitalisation ratios falling below similarly rated local/global peer averages. The introduction of IFRS 9 in 2018 is likely to reduce the bank’s core capital, which has prompted the bank to review its dividend payout policy. Profitability has strengthened over the past four years with the bank’s net interest margin and ROaE increasing 0.3% and 4.4% respectively between F12 and F15. This has been mainly supported by improved lending margins and declining impairment costs, offsetting the increasing operating costs and muted non-funded income growth (primarily resulting from declining trading income).
Driven by recoveries on previous arrears (from both retail and business banking, and corporate and investment banking), strong collections and prudent loan origination, Absa continued to register an improved credit profile. In this regard, the bank’s gross non-performing loan ratio decreased to 3.1% at FYE15 (FYE14: 3.6% and FYE13: 4.4%). Furthermore, specific provisioning coverage increased to 51.2% at FYE15 (FYE14: 50.7% and FYE13: 46.8%).
The bank exhibits a strong and diversified funding base. In spite of negative liquidity gaps in the <1 year maturity buckets (a structural industry feature), the bank preserves adequate liquidity buffers. To this end, in F15, the bank maintained its Liquidity Coverage Ratio (“LCR”) at around 70% (ie, exceeding the 60% minimum limit). Absa may utilise a central bank provided committed liquidity facility, should this be required to enable the bank to meet rising LCR requirements as they are phased in. The net stable funding ratio becomes effective from 2018, but Absa has communicated its ability to comply.
Absa’s aforementioned resilient performance could be negatively impacted by South Africa’s prevailing economic challenges, including low and slowing growth, volatile currency/commodity prices, rising interest rates, and high household indebtedness, which are likely to lead to elevated credit risk and potentially higher impairments for banks, exerting pressure on asset quality indicators, earnings and capital generation. Given the challenging operating conditions in South Africa, there is currently limited upside potential for Absa’s ratings. However, the bank’s ratings could benefit from its ability to significantly gain market share and further diversify its revenue sources. Downward pressure on Absa’s ratings could stem from a further deterioration in market share and macroeconomic conditions (which could adversely affect its asset quality, capital base and earnings power). In addition, the bank’s ratings would be impacted by a weakened shareholder support.
The ratings above are unsolicited and accorded based on publicly available information.
|NATIONAL SCALE RATINGS HISTORY||INTERNATIONAL SCALE RATING HISTORY|
|Initial rating (February 2000)||Initial rating (May 2013)|
|Long-term: AA-(ZA); Short-term: A1+(ZA)||Long term (International LC): BBB+|
|Outlook: Stable||Outlook: Stable|
|Last rating (December 2015)||Last rating (December 2015)|
|Long-term: AA+(ZA); Short-term: A1+(ZA)||Long-term (International LC): BBB|
|Outlook: Stable||Outlook: Stable|
|Primary Analyst||Committee Chairperson|
|Kuzivakwashe Murigo||Jennifer Mwerenga|
|Credit Analyst||Senior Credit Analyst|
|(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)
Absa rating reports (2000-15)
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; c.) such rating was an independent evaluation of the risks and merits of the rated entity; and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
Absa Bank Limited provided commentary on the rating report, and GCR is satisfied that the public information available was sufficient.
The credit ratings above were disclosed to Absa Bank Limited with no contestation of/changes to the ratings.
The ratings above are unsolicited and accorded based on publicly available information.
The information used to analyse Absa Bank Limited and accord the credit ratings included:
- Audited financial results as at 31 December 2015 (and four years of comparative numbers)
- Banking sector information (as supplied in the BA900 Reserve Bank of South Africa reports)
- Industry comparative data
- Other publicly available information.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S FINANCIAL INSTITUTIONS SECTOR 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.|
|Basis Point||1/100th of a percentage point.|
|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.|
|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.|
|Credit Risk||The possibility that a bond issuer or any other borrowers (including debtors/creditors) will default and fail to pay the principal and/or interest when due.|
|Dividend||The portion of a company’s after-tax earnings that is distributed to shareholders.|
|Facility||The grant of availability of money at some future date in return for a fee.|
|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.|
|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.|
|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.|
|Mortgage Loan||A debt instrument where immovable property is the collateral for the loan. A mortgage gives the lender a right to take possession of the property if the borrower fails to repay the loan.|
|National Scale Rating||Provides a relative measure of creditworthiness for rated entities only within the country concerned. Under this rating scale, a ‘AAA’ long term national scale rating will typically be assigned to the lowest relative risk within that country, which in most cases will be the sovereign state.|
|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.|
|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 affirms Absa Bank Limited rating of AA+(ZA); Outlook Negative.