Johannesburg, 30 June 2016 – Global Credit Ratings has affirmed the national scale ratings assigned to African Banking Corporation (Moçambique) S.A. of BB+(MZ) and B(MZ) in the long-term and short-term respectively; with the outlook accorded as Negative. The ratings are valid until June 2017.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to African Banking Corporation (Moçambique) S.A.’s (“BancABC Moçambique”, “the bank”) based on the following key criteria:
The accorded ratings of BancABC Moçambique reflect its weak asset quality, the vulnerability of capital to further stress in asset quality and operating losses, and the challenge the bank faces in executing its turnaround strategy, given shifts in both global and domestic risk dynamics, which continue to negatively impact the local economy. The rating also takes into account demonstrated shareholder support, the introduction of a new management team to turn the bank around, and ongoing efforts to enhance risk management practices.
During F14, the bank’s parent, ABC Holding Limited (“ABCH”), was acquired (98.7% equity stake) by Atlas Mara Limited (“Atlas Mara”), with the full takeover completed in F15. The new shareholders are driving ABCH’s next growth phase and stronger inroads into the retail sector, as well as providing much needed operational, capital and funding support. In F15, shareholders injected a total of USD17m (MZM1.1bn) Tier 1 capital in the form of a fresh capital injection and an equivalent of USD6m conversion of subordinated debt to equity. The bank reported a capital adequacy ratio of 10.4% at FYE15 (FYE14: 9.3%) against a regulatory minimum of 8%.
Asset quality remains a key concern due to high levels of non-performing loans (“NPLs”). NPLs reduced slightly to 11.5% of gross loans at FYE15 (FYE14: 12.1%), partly due to write-offs and restructuring of some exposures. Special mention loans/early (<90 days) arrears remained high at 23.2% of total loans at FYE15 (FYE14: 16.4%). Specific provisions covered a higher 50.8% of NPLs at FYE15 (FYE14: 39.7%), pre-collateral. However, NPLs net of specific provisions to regulatory capital remained high at 48.5% at FYE15 (FYE14: 55.9%) limiting the cushion against any further asset quality deterioration. During 2015, the new shareholders conducted a comprehensive review of the credit lifecycle management process at banking subsidiaries, following which the group embarked on a credit transformation programme (“CTP”) to enhance the credit process, with full implementation expected in 2016. The CTP also introduces better credit scoring and collections capability.
A pre-tax loss of MZM148.2m was recorded in F15, escalating from a loss of MZM70.8m in F14. Earnings performance was impacted by high credit costs, high operating expenses (largely emanating from group recharges) and curtailed loan growth.
Although the structural makeup of the bank’s funding base remains an issue due to high depositor concentrations and an extremely short maturity structure, direct funding and liquidity risks are partly ameliorated by the significant coverage of short-term funding by liquid assets (40.1% at FYE15) and access to intergroup funding.
A sustained improvement in asset quality metrics (including substantial progress in NPL workouts), a positive earnings trend, further strengthening of capital buffers, a more stable and diversified funding/liquidity profile and improved credit underwriting, could lead to upward ratings migration. However, a ratings downgrade could be triggered by further deterioration in asset quality and capital adequacy erosion, deterioration in liquidity metrics and failure to relaunch core business effectively amid adverse macroeconomic developments and business conditions within the domestic market.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (December 2004)|
|Long-term: BBB-(MZ); Short-term: A3(MZ)|
|Last rating (June 2015)|
|Long-term: BB+(MZ); Short-term: B(MZ)|
|Primary Analyst||Committee Chairperson|
|Jennifer Mwerenga||Omega Collocott|
|Senior Credit Analyst||Sector Head: Financial Institution Ratings|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other updated March Financial Institutions, updated March 2016
BancABC Moçambique rating reports (2004-15)
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, security or financial instrument being rated; and c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
African Banking Corporation (Moçambique) S.A. participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit ratings have been disclosed to African Banking Corporation (Moçambique) S.A. with no contestation of the ratings.
The information received African Banking Corporation (Moçambique) S.A. and other reliable third parties to accord the credit rating included:
- Audited financial results of the bank at 31 December 2015 (plus four years of comparative numbers);
- Unaudited management accounts of the bank as at 30 April 2016;
- Budgeted financial statements for 2016;
- Corporate governance and enterprise risk framework;
- Reserving methodologies and capital management policy;
- Industry comparative data and regulatory framework; and
- A breakdown of facilities available and related counterparties.
The ratings above were solicited by, or on behalf of, African Banking Corporation (Moçambique) S.A., and therefore, GCR has been compensated for the provision of the ratings.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S FINANCIAL INSTITUTIONS 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 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.|
|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.|
|Collateral||Asset provided to a creditor as security for a loan.|
|Corporate Governance||Refers to the mechanisms, processes and relations by which corporations are controlled and directed, and is used to ensure the effectiveness, accountability and transparency of an entity to its stakeholders.|
|Credit Rating Agency||An entity that provides credit rating services.|
|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.|
|Downgrade||The assignment of a lower credit rating to a company or sovereign borrower’s debt by a credit rating agency. Opposite of upgrade.|
|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 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.|
|Liquid Assets||Assets, generally of a short term, that can be converted into cash.|
|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.|
|Liquidity Risk||The risk that a company may not be able to meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets. Regarding securities, the risk that a financial instrument cannot be traded at its market price due to the size, structure or efficiency of the market.|
|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.|
|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.|
|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.|
|Regulatory Capital||The total of primary, secondary and tertiary capital.|
|Risk Management||Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy.|
|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.|
|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.|
|Tier 1 Capital||Primary capital consists of issued ordinary share capital, hybrid debt capital, perpetual preference share capital, retained earnings and reserves. This amount is then reduced by the portion of capital that is allocated to trading activities and other regulatory deductions.|
For a detailed glossary of terms utilised in this announcement please click here
GCR affirms African Banking Corporation (Moçambique) S.A.’s rating of BB+(MZ); Outlook Negative.