Johannesburg, 30 June 2017 — Global Credit Ratings has 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 ratings are valid until June 2018.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to African Banking Corporation of Botswana Limited (“BancABC Botswana”, “the bank”) based on the following key criteria:
The ratings of BancABC Botswana reflect its established commercial banking franchise, moderate financial and business profile, and proven support provided by the bank’s ultimate parent company, Atlas Mara Limited.
The bank reported a total risk weighted capital adequacy ratio of 20.2% (FY15: 15.7%) at FY16, which is above the prudential minimum of 15%, and the bank’s internal target of 17%. The improvement in capitalisation in FY16 (Tier 1 capital of BWP921.2m (FY15: BWP750.9m)) was supported by strong internal capital generation (FY16: 18.4%) and an increase in subordinated debt (qualifying as Tier 2 capital) of BWP55m.
The bank’s gross non-performing loan (“NPL”) ratio increased to 4.2% (FY15: 3.3%), in line with the industry average of 4.4% (FY15: 3.9%), largely emanating from the bank’s retail and small and medium enterprises portfolio. Specific provisions covered 46.6% of NPLs at FY16 (FY15: 48.4%), pre-collateral. The ratio of NPLs net of provisions to the bank’s capital was 12.4% at FY16 (FY15: 10.8%).
Pre-tax profit grew by 42.6% over the review period mainly due to growth in net interest income following a decline in funding costs. As a result, the bank’s net interest margin expanded to 7.1% in FY16 from 5.8% in FY15. The FY16 ROaE and ROaA increased to 20.2% (FY15: 17.3%) and 2.1% (FY15: 1.7%), respectively.
The structural makeup of the bank’s funding base remains a rating constraint, due to a dependence on confidence sensitive and relatively expensive term wholesale funding, high depositor concentration and a short maturity profile, which presents a high degree of liquidity and refinancing risk. The bank’s liquid assets as a proportion of total assets increased to 16.5% (FY15: 13.3%) at FY16, which was above the industry average of 15.1%, and provide an element of liquidity support.
Strong capital and liquidity buffers, a more balanced funding profile, an extended track record of solid asset quality and earnings performance, as well as a sustained recovery of the operating environment, could enhance the ratings. A marked deterioration in asset quality (on the back of aggressive loan growth or an increase in unprovided NPLs), earnings, liquidity and capital adequacy indicators, could result in a downgrade of the bank’s ratings. In addition, deterioration in economic prospects and the consequent increase in credit losses and stability risks could see the ratings come under pressure.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (December 2005)|
|Long-term: BBB-(BW); Short-term: A3(BW)|
|Last rating (June 2016)|
|Long-term: BBB-(BW); Short-term: A3(BW)|
|Sector Head: Financial Institution Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2017
BancABC Botswana rating reports (2005-16)
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, 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 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 of Botswana Limited with no contestation of the rating.
The information received from African Banking Corporation of Botswana Limited and other reliable third parties to accord the credit ratings included:
- Audited financial results as at 31 December 2016 (and four years of comparative numbers)
- Unaudited management accounts up to 30 April 2017
- Budgeted financial statements for 2017
- Latest internal and/or external audit report to management
- A breakdown of facilities available and related counterparties
- Corporate governance and enterprise risk framework
- Industry comparative data
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 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.|
|Audit Report||A written opinion of an auditor (attesting to the financial statements’ fairness and compliance with generally accepted accounting principles).|
|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|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.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|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.|
|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.|
|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.|
|Financial Institution||An entity that focuses on dealing with financial transactions, such as investments, loans and deposits.|
|Financial Statements||Presentation of financial data including balance sheets, income statements and statements of cash flow, or any supporting statement that is intended to communicate an entity’s financial position at a point in time.|
|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.|
|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.|
|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.|
|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.|
|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.|
|Provision||The amount set aside or deducted from operating income to cover expected or identified loan losses.|
|Refinancing||The issue of new debt/loan to replace maturing debt/loan. New debt may be provided by existing or new lenders, with a new set of terms in place.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Securities||Various instruments used in the capital market to raise funds.|
|Security||An asset deposited or pledged as a guarantee of the fulfilment of an undertaking or the repayment of a loan, to be forfeited in case of default.|
|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 2 Capital||Secondary capital is mainly made up of subordinated debt, portfolio impairment and 50% of any revaluation reserves and other specified regulatory deductions.|
For a detailed glossary of terms please click here
GCR affirms African Banking Corporation of Botswana Limited’s rating of BBB-(BW); Outlook Stable.