Johannesburg, 30 April 2015 — 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 Stable. 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 (“GCR”) has accorded the above credit rating(s) to Absa Bank Limited (“Absa” or “the bank”) based on the following key criteria:
Absa is a wholly owned subsidiary of Barclays Africa Group Limited (“the group”), which is in turn majority owned by Barclays Bank Plc (“Barclays”). The ratings of Absa are underpinned by its sound financial profile, strong market position (being one of South Africa’s largest financial institutions), and the ability to leverage off a solid brand name and strong technical and financial support obtainable from its ultimate parent, Barclays. However, the bank’s ratings are weighed down by a weaker South African economic growth outlook, particularly in the context of consumer affordability pressures, evidenced by the bank’s modest 3.3% net loan book growth at FYE14.
Despite a decrease in net generated equity (due to a dividend payout that exceeded an additional share issue), Absa’s capital position remains strong (fuelled by high internal capital generation). Its capital adequacy ratio (13.7%) at FYE14 remains above both the top end of the board’s target range (13.5%), and the minimum regulatory requirement (10.0%). To augment its funding and capital base, the group aims to issue senior unsecured and Tier II subordinated debt in 2H F15.
The bank’s credit profile continued to improve, with non-performing loans (“NPLs”) reducing from 5.6% of gross loans at FYE12 to 3.6% at FYE14, supported by strict lending criteria, a focus on low risk existing customers, and enhanced collections. Furthermore, specific provision coverage on the remaining NPLs rose to 7.3% at FYE14 (F13: 4.8%).
Profitability, as measured by return on average assets and equity rose to six year highs of 1.2% and 17.4% respectively at FYE14 (FYE09: 0.8%; 13.9%), boosted chiefly by a higher interest margin and a decline in bad loan costs in Absa’s retail and commercial mortgages sectors. This was in spite of muted non-funded income growth, due to losses on some trading activities and fee income pressure on the Retail and Business Banking division, as well as an 8.8% increase in operating expenditure (relating mainly to staff costs), resulting in a higher cost to income ratio of 59.4% in F14 (F13: 57.5%).
The bank has a robust funding/liquidity profile. Notwithstanding the bank’s negative liquidity gap in <1 year (a structural industry feature), which amounted to 1.8x equity, the bank’s adequate liquidity buffers (liquidity ratio of 20.8%), support from its parent and the perceived stability of the bank in South Africa are viewed as considerable mitigants.
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 macroeconomic conditions, which could adversely affect its asset quality, capital base and earnings power.
The ratings above are unsolicited and accorded based on publicly available information.
|NATIONAL SCALE RATINGS HISTORY||INTERNATIONAL SCALE RATINGS HISTORY|
|Initial rating (Feb/2000)||Initial rating (May/2013)|
|Long term: AA-(ZA); Short term: A1+(ZA)||Long term (International): BBB+|
|Outlook: Stable||Outlook: Stable|
|Last rating (July/2014)||Last rating (July/2014)|
|Long term: AA+(ZA); Short term: A1+(ZA)||Long term (International): BBB+|
|Outlook: Stable||Outlook: Negative|
Sector Head: Financial Institution Ratings
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2015
South Africa Bank Bulletin (2014)
Absa rating reports (2000-2014)
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/RATING-SCALES-DEFINITIONS. 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 did not participate in the rating process, though 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 rating(s) included the 31 December 2014 audited financial statements (plus four years of comparative numbers); banking sector information (as supplied in the BA900 Reserve Bank of South Africa reports); and other publicly available information.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S FINANCIAL INSTITUTIONS GLOSSARY
|Asset||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|Asset Quality||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 (i.e. being paid back in accordance with their terms) and the likelihood that they will continue to perform.|
|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.|
|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.|
|Financial Institution||An entity that focuses on dealing with financial transactions, such as investments, loans and deposits.|
|International Scale Rating||ISRs relate to either foreign currency or local currency commitments, assessing the capacity of an issuer to meet these commitments using a globally applicable (and therefore internationally comparable) scale.|
|Leverage||With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.|
|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.|
|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.|
|National Scale Rating||The national scale 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.|
|Non-Performing Loan||When a borrower is overdue, typically 90+ days in arrears or as defined by the lender, or in the transaction documents.|
|Performing Loan||A loan is said to be performing if the borrower is paying the interest on it on a timely basis.|
|Portfolio||A collection of investments held by an individual investor or financial institution. They may include stocks, bonds, futures contracts, options, real estate investments or any item that the holder believes will retain its value.|
|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.|
|Shareholder||An individual, entity or financial institution that holds shares or stock in an organisation or company.|
|Short Term||Current; ordinarily less than one year.|
|Subordinated Debt||Debt that in the event of a default is repaid only after senior obligations have been repaid. It is higher risk than senior debt.|