Johannesburg, 29 June 2018 — Global Credit Ratings has affirmed the long and short term national scale ratings assigned to African Banking Corporation of Botswana Limited of BBB-(BW) and A3(BW) respectively; with the outlook accorded as Stable. The ratings are valid until June 2019.
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 factors:
The rating of BancABC Botswana reflects currently good levels of capitalisation, supported by durable internal capital generation, alongside a fairly granular loan book and currently low levels of non-performing loans (“NPLs”), albeit with low levels of reserve coverage. We also view the bank’s core position within the wider BancABC group as supportive of ratings. The ratings are restrained by limited scale, high funding concentrations and modest balance sheet liquidity.
The stable outlook reflects our assumptions that as the Botswanan economy improve it will help maintain the banks current financial performance and asset quality. We could raise the ratings if the bank successfully lowers its funding concentrations, improves liquidity and brings up the loan loss reserve coverage to more appropriate levels. We could lower the ratings if liquidity deteriorates, funding concentrations increase and/or if asset quality underperforms our current expectations.
The bank reported a total risk weighted capital adequacy ratio of 19.8% (FY16: 20.2%) at FY17, which is above the prudential minimum of 15%. The improvement in capitalisation in FY17 (Tier 1 capital of BWP1 029.2m (FY16: BWP921.2m) was supported by strong internal capital generation of 13.0% at FY17 (FY16: 18.4%).
BancABC Botswana’s gross NPL ratio improved to 3.6% (FY16: 4.2%), which is significantly better than the industry average of 5.5%, testifying to the banks effort to improve their credit profile on the back of a constrained economic activity. Specific provisions covered 35.9% of NPLs at FY17 (FY16: 46.6%), pre-collateral which is considered to be moderate. The ratio of NPLs net of specific provisions to the bank’s regulatory capital was 11.8% at FY17 (FY16: 12.4%).
Pre-tax profits for the bank deteriorated by 17.9% in FY17 against a 42.6% increase in FY16 largely due to cost of funding increase and a reduction in non-interest income. Resultantly, the bank’s net interest margin decreased to 6.4% in FY17 from 7.1% in FY16 with the cost ratio increasing to 62.1% from 57.1%. The FY17 ROaE and ROaA deteriorated to 13.9% (FY16: 20.2%) and 1.7% (FY16: 2.1%), respectively.
High depositor concentration and a short liability maturity profile present a high degree of liquidity and refinancing risk. The bank’s liquid assets as a proportion of total assets increased to 12.4% (FY16: 16.5%) at FY17, and provided an element of liquidity support.
The rating could be enhanced by a reduction in funding concentrations, improved liquidity and loan loss reserve coverage, and sustained recovery in the operating environment. Deterioration in liquidity and/or asset quality, increase in funding concentrations and loss of competitiveness could result in a rating downgrade.
| NATIONAL SCALE RATINGS HISTORY | |
| Initial rating (December 2005) | |
| Long-term: BBB-(BW); Short-term: A3(BW) | |
| Outlook: Positive | |
| Last rating (June 2017) | |
| Long-term: BBB-(BW); Short-term: A3(BW) | |
| Outlook: Stable | |
| ANALYTICAL CONTACTS | |
| Primary Analyst | Secondary Analyst |
| Vimbai Muhwati | Kudzanai Samanga |
| Credit Analyst | Junior Credit Analyst |
| (011)784-1771 | (011)784-1771 |
| vimbaim@globalratings.net | kudzanais@globalratings.net |
| Committee Chairperson | |
| Matthew Pirnie | |
| Sector Head: Financial Institution Ratings | |
| (011) 784-1771 | |
| matthewp@globalratings.net |
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2017
BancABC Botswana rating reports (2005-17)
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 meetings and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit rating has 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 2017 (and four years of comparative numbers);
- Unaudited management accounts up to 30 April 2018;
- Budgeted financial statements for 2018;
- Latest internal and/or external audit report to management;
- A breakdown of facilities available and related counterparties;
- Corporate governance and enterprise risk framework; and
- Industry comparative data.
The ratings above were solicited by, or on behalf of, African Banking Corporation of Botswana Limited, and 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
