Johannesburg, 15 May 2017 — 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 BB+; with the outlook accorded as Negative.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) 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 resilient performance over the review period, supported by rising capital and liquidity buffers, amid slow economic growth, and weaker political and institutional stability. The ratings also reflect the bank’s moderating competitive position and weakening support framework.
Currently, Absa is wholly owned by Barclays Africa Group Limited (“the group”), which in turn is majority owned by Barclays Bank Plc (“the parent”, “Barclays”). Absa’s ratings have historically been supported by the profile and commitment of its parent. However, Barclays’ impending reduction of its controlling stake in the group, which is awaiting regulatory approval, signals reduced commitment, and Absa’s limited strategic importance to the parent.
Absa’s capital adequacy ratio increased to 15.1% at FY16 (FY15: 13.6%), and remained above the minimum regulatory requirement of 10.4% and board-approved target range. However, the impact of IFRS 9, which is still being evaluated by the bank, is expected to reduce Absa’s capitalisation in 2018 (the quantum of which depends on final clarity regarding its implementation phasing).
Gross loans and advances to customers increased by c.5% (FY15: c.8.4%), reflecting challenging macroeconomic conditions which continue to put pressure on consumers and businesses. The bank’s gross non-performing loan (“NPL”) ratio rose to 3.7% at FY16 (FY15: 3.3%), and its credit loss ratio increased to 0.9% (FY15: 0.8%), due to credit quality deterioration across most retail portfolios and some single name defaults in wholesale banking. Absa’s asset quality indicators could weaken further should inflation and interest rates rise over the short term, which will place additional pressure on consumers’ ability to service debt.
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, the bank’s Liquidity Coverage Ratio (“LCR”) improved to c.95% in FY16 from c.70% in FY15 (exceeding the 70% 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. We believe Absa remains committed to comply with the net stable funding ratio which becomes effective in 2018.
Profitability weakened in FY16 as subdued revenue margins, an increasing credit loss ratio, and deleveraging, compressed ROaE to 15.2% (FY15: 16.5%). Net interest margin growth remained subdued over the past three years, supported by the bank’s move to gradually reduce exposure to unsecured lending, in favour of focusing on secured lending. Low growth (FY16: 0.7%) in retail deposits is altering the bank’s funding structure and, together with a weak economic environment, has resulted in moderate loan book growth. Notably, the balance sheet shrunk 1.9% in FY16 leading to a drop in total assets market share to 18.8% at FY16 (FY15: 19.7%).
Increased funding costs, regulatory challenges, and a volatile domestic political and economic climate, could place further pressure on Absa’s earnings and asset quality metrics, thereby challenging the bank’s resilience shown to date.
The negative rating outlooks imply that ratings upgrades are unlikely over the medium term. In addition, the ratings are unlikely to stabilise at the current level given GCR’s expectation for a further weakening in the bank’s shareholder support structure following the finalisation of Barclays’ intended sale of its majority stake in the group. A less resilient financial/business profile and/or a weaker government support framework will also place negative pressure on Absa’s ratings. Furthermore, the international scale rating will be sensitive to changes in South Africa’s sovereign rating.
|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 (May 2017)||Last rating (May 2017)|
|Long-term: AA+(ZA); Short-term: A1+(ZA)||Long-term (International LC): BB+|
|Outlook: Negative||Outlook: Negative|
Sector Head: Financial Institutions Ratings
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2017
South Africa Bank Statistical Bulletin (December 2016)
Absa rating reports (2000-16)
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 did not participate in the rating process, though GCR is satisfied that the public information available was sufficient.
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 2016 (and four years of comparative numbers);
- Banking sector information (as supplied in the BA900 Reserve Bank of South Africa reports);
- Industry comparative data; and
- Other publicly available information.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S FINANCIAL INSTITUTIONS SECTOR GLOSSARY
|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.|
|Balance Sheet||Also known as a 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.|
|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.|
|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.|
|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.|
|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.|
|Facility||The grant of availability of money at some future date in return for a fee.|
|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.|
|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.|
|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.|
|Rating Outlook||Indicates the potential direction of a rated entity’s rating over the medium term, typically one to two years. An outlook may be defined as: ‘Stable’ (nothing to suggest that the rating will change), ‘Positive’ (the rating symbol may be raised), ‘Negative’ (the rating symbol may be lowered) or ‘Evolving’ (the rating symbol may be raised or lowered).|
|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.|
|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.|
|Wholesale Banking||A term used for banking services offered to other corporate entities, large institutions and other financial institutions.|
For a detailed glossary of terms please click here
GCR affirms Absa Bank Limited’s rating of AA+(ZA); Outlook Negative.