Johannesburg, 10 Jun 2015 – Global Credit Ratings has today affirmed the national scale ratings assigned to African Banking Corporation of Botswana Limited of BBB-(BW) and A3(BW) in the long term and short term respectively; with the outlook accorded as Stable. The rating(s) are valid until 06/2016.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating(s) to African Banking Corporation of Botswana Limited (“BancABC Botswana” and/or “the bank”) based on the following key criteria:
The accorded ratings reflect BancABC Botswana’s established domestic franchise value, risk appropriate capitalisation and proven support structure provided by its parent company, ABCH Holdings Limited. During F14, the bank’s parent was acquired by Atlas Mara Limited (“Atlas Mara”), which is expected to provide much needed operational, capital and funding support for the group’s next growth phase, and increased traction in the retail segment.
Despite the capital base growing slightly slower than assets, and the resulting decrease in key capital adequacy indicators, the bank is considered to be adequately capitalised. The bank reported a total risk weighted capital adequacy ratio of 17.6% at FYE14 (FYE13: 18.4%), against a prudential minimum of 15%.
Asset quality remained under pressure in F14. Arrears growth decelerated to 45.2% (F13: 179.0%), to BWP74m in F14, assisted by loan write-offs and (to a lesser extent) loan restructuring and recoveries. The gross non-performing loan (“NPL”) ratio stood at 3.9% at FYE14 (FYE13: 2.9%) against an industry average 2.6%. However, provision cover amounted to a higher 82.1% (FYE13: 56.8%), pre-collateral. Consequently, net NPLs decreased to 0.7% (FYE13: 1.3%) and 3.9% (FYE13: 7.2%) of net loans and capital respectively.
Net profit before tax of BWP91.5m was recorded for F14, down 53.3% from BWP196.2m in F13. Customer deposits and loans and advances growth were significantly below expectations, which negatively impacted earnings targets. Further, despite successful cost containment, high impairment charges and funding costs reduced profitability. The F14 ROaE and ROaA declined to 11.9% (F13: 31.5%) and 1.2% (F13: 2.9%) respectively.
The structural makeup of the bank’s funding base remains an issue, due to high depositor concentration and a short maturity profile. The liquidity ratio (excluding statutory reserves and balances with related parties) closed the year at 10.4%, which was slightly above the statutory minimum of 10% and below the industry average of 14.4%.
A positive earnings trend (while maintaining credit protection factors), the diversification of income streams, a reduction in funding costs (on the back of the retail strategy) and strengthening of the bank’s competitive position may have a positive impact on the ratings. However, the ratings could face downward pressure if earnings and asset quality (as reflected by NPLs in both nominal and percentage terms) deteriorate due to imprudent loan growth and/or weak credit administration. Furthermore, adverse economic developments on the back of a weak global market (given the elasticity of diamond exports to economic performance of key trading partner economies), could impact the overall financial condition of the bank and the financial sector in general.
NATIONAL SCALE RATINGS HISTORY
Initial rating (Dec/2005)
Long-term: BBB-(BW); Short-term: A3(BW)
Last rating (Jun/2014)
Long-term: BBB-(BW); Short-term: A3(BW)
Senior Credit Analyst
Sector Head: Financial Institution Ratings
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2015
BancABC Botswana rating reports (2005-14)
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 of Botswana Limited 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 rating/s has been disclosed to African Banking Corporation of Botswana Limited with no contestation of the rating.
- Audited financial results of the bank as at 31 December 2014
- Unaudited interim results of the bank as at 30 April 2015
- Five years of comparative numbers
- Budgeted financial statements for 2015
- Latest internal and/or external report to management
- Reserving methodologies
- A breakdown of facilities available and related counterparties
- Corporate governance and enterprise risk framework
- Capital management policy
- Industry comparative and regulatory framework
The ratings above were solicited by, or on behalf of, African Banking Corporation of Botswana Limited, 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||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 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.|
|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 Rating Agency||An entity that provides credit rating services.|
|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.|
|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.|
|Franchise||Business or banking franchise; a bank’s business.|
|Impairment||Reduction in the value of an asset because the asset is no longer expected to generate the same benefits, as determined by the company through periodic assessments.|
|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.|
|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.|
|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.|
|Provision||The amount set aside or deducted from operating income to cover expected or identified loan losses.|
|REPO||In a REPO one party sells assets or securities to another and agrees to repurchase them later at a set price on a specified date.|
|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.|
|Solvent||The state of a company where its assets exceed its liabilities and it is able to service its debt and meet its other obligations, especially in the long-term.|
|Write-off||The total reduction in the value of an asset.|