Announcements Financial Institutions Rating Alerts

GCR affirms ABSA Bank Limited’s issuer ratings with Negative Outlooks

Rating Action

Johannesburg, 10 July 2020 – GCR Ratings (“GCR”) has affirmed the South African long and short-term unsolicited issuer ratings of ABSA Bank Limited at AA(ZA)/A1+(ZA). At the same time, the international scale long-term unsolicited issuer rating has been affirmed at BB. The outlooks are Negative.

Rated Entity

Rating class

Rating scale

Rating

Outlook/Watch

ABSA Bank Limited

Long Term issuer

National

AA(ZA)

Negative

Short Term issuer

National

A1+(ZA)

Long term issuer

International

BB

Negative

The rating action follows a reduction in the South African country and financial institutions sector risk assessments.

  • On June 24, 2020, the South African Financial Institutions sector risk score was lowered to 7.5, from 8.0 previously. Click here to access link.
  • The South African country risk score was also lowered to 7.0, from 7.5 previously, in a market alert released on the 27th May 2020. Click here to access link.

Combined, the above country and sector risk scores comprise the operating environment score, which is a key input into GCR’s ratings.

Rating Rationale

The negative outlooks are primarily reflective of the tough economic climate in South Africa that is expected to negatively impact on ABSA Bank Limited’s (“ABSA”) risk profile over the short to medium term, particularly given its strong retail focus, which GCR views to be a more vulnerable segment of the market. We think interest rates will remain low over the next 12 – 18 months and earnings will not recover to historical levels. This will pressure internal capital generation over the medium term. However, the bank is expected to remain adequately capitalised, with funding and liquidity likely to be in line with peers.

The unsolicited international and South African national scale ratings of ABSA reflect the strengths and weaknesses of the wider Absa Group (“the group”). These balance the group’s position as one of the top tier banking groups in an oligopolistic South African banking market, meaningful business and geographic diversification (albeit typically within countries of higher country risk), good risk position, historically strong earnings which support its intermediate levels of capitalisation, and funding and liquidity risks that are in line with top tier domestic peers.

The group’s operations are dominated by the South African bank, which offers universal banking services and has a relatively stronger retail than corporate franchise. The group also has operations across 12 African countries, which make up 10% of its total loans and contributed to the group’s overall earnings growth, driving a 13% increase in headline earnings. GCR believes that the banking group has good market positions in each of the countries of operations with a history of appropriate revenue stability, and this is positively viewed. As such, slight uplift was given for competitive positioning to reflect the regional competitiveness of the group.

Capitalisation is slightly negative to the rating, with the GCR capital ratio expected to trend around 12% over the medium term. As with most of the big banking groups in South Africa, we are anticipating significant earnings strain in 2020 on the back of large interest rate cuts, reduced transaction volumes (lowering commission and fee based income) and higher credit losses. While this will weigh on capital adequacy, the bank’s commitment not to pay dividends along with moderate levels of risk asset growth will support capital preservation. GCR also believes there is sufficient buffers in place at the current scoring level, which in conjunction with slightly better earnings forecast for 2021, should underpin capitalisation strength through the cycle.

The onset of the COVID-19 pandemic is likely to see a deterioration in the group’s asset quality over the next 12-18 months. In this regard, based on industry wide guidance, and also factoring in the bank’s strong retail focus (which is viewed to be more vulnerable in the current operating environment), GCR has factored into the rating credit losses of just under 2% in 2020. This is notably above the historically contained levels between 0.6%-0.8%, and is indicative of the highly strained operating environment. Nonetheless, the group’s risk position is viewed to be comparable to major peers, and part of the expected deterioration has already been factored into the sector risk score.

The funding and liquidity position is considered to be a neutral for the ratings, reflecting similar mid-term funding concentrations and good liquidity as other top tier banks. Financial corporates contribute around 25% of the total funds, lower than the market average but this is still a risk for the bank. Household contribution was fairly good versus the market average (28% v 25%), but non-financial corporates compare poorly (18% to 22%) and the bank does utilise capital markets more. The GCR stable funding ratio of around 75% is in line with the market average and, like most SA banks, the loan to deposit ratio is high. From a regulatory point of view, the Net Stable Funding Ratio (“NSFR”) and Liquidity Coverage Ratio (“LCR”) were reported at 112% and 121% at March 2020 respectively, well above regulatory minimums. The LCR declined slightly from December due to clients reducing the term structure of their deposits given market conditions in March.

Outlook Statement

The negative outlook is primarily reflective of the tough economic climate in South Africa that is expected to negatively impact on ABSA’s risk profile over the short to medium term, particularly given its strong retail focus, which GCR views to be a more vulnerable sector. We think interest rates will remain low over the next 12 – 18 months and earnings will not recover to historical levels over the medium term. However, the bank is expected to remain adequately capitalised, with funding and liquidity likely to be in line with peers, but the potential for risk to weaken beyond expectations is captured in the negative outlook at this stage. This also reflects the broadly negative theme across the core operating sector.

Rating Triggers

Should credit losses rise significantly above expectations and industry peers, the national scale ratings will be downgraded as this will also impede internal capital generation and constrain risk based capital adequacy. The bank’s international scale rating could be lowered if the country risk of South Africa deteriorates, most likely due to the weakening position of its sovereign. The outlooks may revert to stable should credit losses be more favourable than expected, capitalisation remains at a similar level and/or an improved outlook for the operating environment.

Analytical Contacts: ABSA Bank Limited

Primary analyst

Vinay Nagar

Senior Financial Institutions Analyst

Johannesburg, ZA

Vinay@GCRratings.com

+27 11 784 1771

     

Committee chair

Matthew Pirnie

Group Head of Ratings

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, May 2020

GCR Financial Institutions Sector Risk Score, June 2020

Ratings History

ABSA Bank Limited

Rating class

Review

Rating scale

Rating class

Outlook

Date

Long Term issuer

Initial

National

AA-(ZA)

Stable

February 2000

Last

National

AA(ZA)

Stable

August 2019

Initial

International

BBB+

Stable

May 2013

Last

International

BB

Stable

August 2019

Short Term issuer

Initial

National

A1(ZA)

N/a

February 2000

Last

National

A1+(ZA)

N/a

August 2019

RISK SCORE SUMMARY

Rating Components & Factors

Risk scores

 

 

Operating environment

14.00

Country risk score

6.50

Sector risk score

7.50

   

Business profile

1.25

Competitive position

1.25

Management and governance

0.0

   

Financial profile

0.50

Capital and Leverage

(0.50)

Risk

1.00

Funding and Liquidity

0.00

   

Comparative profile

0.00

Group support

0.00

Government support

0.00

Peer analysis

0.00

   

Total Score

15.75

Glossary

Balance Sheet

Also known as Statement of Financial Position. A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been financed.

Capital

The sum of money that is invested to generate proceeds.

Cash

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

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.

Diversification

Spreading risk by constructing a portfolio that contains different exposures whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.

Exposure

Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For a company, its exposure may relate to a particular product class or customer grouping. Exposure may also arise from an overreliance on one source of funding. In insurance, it refers to an individual or company’s vulnerability to various risks

Income

Money received, especially on a regular basis, for work or through investments.

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.

Issuer

The party indebted or the person making repayments for its borrowings.

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 Rating

See GCR Rating Scales, Symbols and Definitions.

Margin

A term whose meaning depends on the context. In the widest sense, it means the difference between two values.

Market

An assessment of the property value, with the value being compared to similar properties in the area.

Maturity

The length of time between the issue of a bond or other security and the date on which it becomes payable in full.

Rating Outlook

See GCR Rating Scales, Symbols and Definitions.

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 Rating

See GCR Rating Scales, Symbols and Definitions.

Short Term

Current; ordinarily less than one year.

SALIENT POINTS OF ACCORDED RATINGS

GCR affirms that a.) no part of the ratings was 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; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

The credit ratings have been disclosed to the rated entity.

The ratings were unsolicited, and therefore, GCR has been not been compensated for the provision of the ratings.

Absa Bank Limited, did not participate in the ratings process, however the quality of public disclosure from audited accounts and risk management booklets, alongside regulatory returns, meets our information sufficiency requirements.

 

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