Johannesburg, 08 July 2021 – GCR Ratings (“GCR”) has affirmed the unsolicited national scale long and short-term issuer ratings of Absa Bank Limited at AA(ZA) and A1+(ZA) respectively, with a Negative Outlook. At the same time, the unsolicited international scale long-term issuer rating has been affirmed at BB, Negative Outlook maintained. GCR has also assigned a short-term international scale rating of B.
|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|
|Short Term issuer||International||B|
The unsolicited ratings of Absa Bank Limited (“Absa”) are based on the credit profile of Absa Group Limited (“the group”). Absa is regarded as the core operating entity within the group and accounts for 85% of group assets.
The ratings of the group reflects its position as one of the largest financial institutions on the continent supporting a strong franchise, particularly in the home market, moderate risk profile with higher credit losses compared to peers, adequate capital and leverage and ample liquidity that caters for the relatively higher exposure to wholesale type funding.
The group’s competitive positioning benefits from its strong local footprint, with domestic assets representing around 19.5% of total industry assets at December 2020. The oligopolistic sector structure prevents aggressive competitive pressure which is beneficial for pricing and earnings stability, as reflected by historically strong earnings – although earnings are somewhat more volatile for Absa. The group also has exposure across the African continent (outside of South Africa) which supports geographic diversification.
Recent events (such as the unplanned departure of the previous CEO (April 2021)) have highlighted some management and governance concerns, although no negative adjustment was made for this. However, GCR will continue to monitor management and governance developments should these recent events impede the group’s ability to effectively execute the board’s strategy.
The group’s asset quality weakened in the last 18 months, having reported a credit loss ratio (“CLR”) of 1.92% at December 2020 (0.80% at December 2019), well above the group’s through-the-cycle internal guidance range of 0.75% to 1.00%. The South African Retail and Business Banking division reported a CLR of 2.64% (1.18% at December 2019) and the South African Corporate and Investment Bank (“CIB”) reported a significant CLR increase to 0.54% at December 2020 (0.11% at December 2019). Non-performing loans (“NPLs”) for Retail and Business Banking division increased to 6.6%, the Consumer segment increased to 4.8% and Commercial segment increased to 11.2%.
The Group’s Covid-19 payment relief programme started across the bank’s various segments from March 2020 for eligible customers as a short-term financial relief to reduce or defer monthly instalments. Fortunately, 92.3% of all loans and advances to customers were up to date with their revised terms at December 2020. Forward looking CLR’s are expected to range from a moderate 1.0% to 1.4%, this is primarily due to improvements of retail and CIB asset quality.
The group is adequately capitalised, with the GCR total capital ratio expected to trend within a range of 12.1%-12.3% over the next 12-18 months which is aligned to our expectations for peers. This is likely to be supported by a recovery of earnings on the back of our expectations that interest rates may begin to rise in the latter part of the year, slightly higher than peer credit losses, and an increase of transaction volumes and new loan originations. Dividends are expected to resume from Q1 2021.
The Funding and Liquidity position is considered to be neutral to the ratings. The group’s core deposits (except for Insurance, Pension and Private financial corporate sectors) as a percentage of total deposits was 78.3% at 31 December 2020. The GCR stable funding ratio of around 82.3% 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 116.0% and 117.7% at March 2021 respectively, well above regulatory minimums.
Core credit metrics are adequate, although we note below average earnings that moderated capital and leverage in 2020. GCR expects a slight earnings rebound in 2021, which along with loan growth forecasts (especially in South Africa) of 4% to 6% and some moderation of credit losses, could support a GCR total capital ratio of around 12%, which would be in line with our peer expectations. Nonetheless, we think asset quality will continue to remain under pressure given the largely retail focus of the group, which could pressure the ratings should key ratios such as the CLR and NPLs remain elevated and above the peer average. The Negative outlook on the international scale factors in the uncertainty of the operating environment, which could negatively impact the country and sector risk scores causing a downgrade to the ratings.
Upward movement on the international scale ratings is limited, given the Negative outlook and broadly negative sentiment in the operating environment score, but over the medium term, a material improbably will relate to stabilisation of the South African economy and continued resilience of the banking sector could see the outlook revert to Stable. The national scale rating outlook may revert to stable should asset quality evidence an improvement and aligns to the peers. Over the medium term, positive ratings action may stem from growing market share whilst maintaining acceptable CLR and adequate capital and liquidity ratios.
The international scale ratings could be downgraded if the operating environment score is lowered, while downward rating pressure on the national scale ratings could emanate from sustained earnings weakness. Further to this, any further deterioration in asset quality, capital and erosion of liquidity buffers could result in negative ratings action.
|Primary analyst||Corné Els||Senior Financial Institutions Analyst|
|Johannesburg, ZA||CorneE@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 Rating Scales, Symbols & Definitions, May 2019|
|GCR Country Risk Scores, July 2021|
|GCR Financial Institutions Sector Risk Score, June 2021|
Absa Bank Limited
|Rating class||Review||Rating scale||Rating class||Outlook||Date|
|Issuer Long Term||Initial||National||AA-(ZA)||Stable||February 2000|
|Issuer Short Term||Initial||National||A1(ZA)||N/a||February 2000|
Risk Score Summary
|Rating Components & Factors||Risk Scores|
|Country risk score||6.75|
|Sector risk score||7.50|
|Management and governance||0.00|
|Capital and Leverage||(0.50)|
|Funding and Liquidity||0.00|
|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 RATING
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 not been disclosed to the rated entity. The ratings were unsolicited, and therefore GCR has not been compensated for the provision of the ratings.
Absa Bank Limited Limited did not participate in the rating process, however, the quality of public disclosure from audited accounts and risk management booklets, alongside regulatory returns, meets our information sufficiency requirements.