Johannesburg, 31 May 2017 — Global Credit Ratings has affirmed the national scale ratings assigned to African Banking Corporation of Zimbabwe Limited of BB+(ZW) and B(ZW) in the long term and short term respectively; with the outlook accorded as Stable. The ratings are valid until May 2018.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to African Banking Corporation of Zimbabwe Limited (“BancABC Zimbabwe” or “the bank”) based on the following key criteria:
The ratings of BancABC Zimbabwe reflect its weak, albeit improving, asset quality (within a challenging operating environment), and improved capitalisation in FY16, despite weaker earnings. The ratings also factor in the bank’s access to funding and technical support from Atlas Mara Limited (“Atlas Mara”, “the group”), the bank’s ultimate shareholder.
Despite the sale of non-performing loans (“NPLs”) to the value of USD17.4m to the Zimbabwe Asset Management Corporation (“ZAMCO”), a special purpose vehicle formed to buy banks’ secured NPLs in exchange for long term treasury bonds, and the write-off of USD12.4m, the bank’s gross NPL ratio remained very high (24.4%) at FY16 (FY15: 27%), largely due to a shrinking loan book. Notably, the bank’s net NPLs (ie, NPLs less provisions) to total capital ratio decreased from 92.1% to 62%, but still remains elevated.
In addition to high depositor concentrations, the bank’s negative contractual asset/liability mismatches at FY16, given the significant amount of short-term funding (in particular less than one month deposits), heightens liquidity risk. However, the bank’s prudential liquidity ratio (on average) remained above the minimum regulatory requirement of 30% throughout FY16.
A decline in risk-weighted assets (given its deposit-led growth strategy) saw the bank’s capital adequacy metrics improve, and remain above regulatory requirements at FY16. The bank’s total risk weighted capital adequacy ratio improved to 20.9% at FY16 (FY15: 16.5%). BancABC Zimbabwe’s core capital of USD71.6m was well above the current statutory minimum of USD25m.
The bank posted an after-tax profit of USD1.8m in FY16, a 23.6% decrease from the USD2.4m profit achieved in FY15, mainly due to a decline in operating revenues on account of a narrowing risk appetite, which led to margin pressure. Net interest income reduced by 35% in FY16, driven by a decrease in lending volumes. While the lower interest rate and fee environment put further pressure on earnings, it was partly offset by a decrease in the cost of funding, and operating expenses.
An upward movement of the ratings would be contingent on a demonstrated track record of improving profitability and asset quality, together with stable/improving capitalisation. The ratings could come under pressure if there is a weakening in asset quality, capitalisation and/or operating conditions, and any diminution/withdrawal of parental support.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (December 2004)|
|Long-term: BBB-(ZW); Short-term: A3(ZW)|
|Last rating (May 2016)|
|Long-term: BB+(ZW); Short-term: B(ZW)|
Sector Head: Financial Institutions Ratings
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2017
BancABC Zimbabwe rating reports (2004-16)
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 Zimbabwe 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 ratings haves been disclosed to African Banking Corporation of Zimbabwe Limited with no contestation of the rating.
The information received from African Banking Corporation of Zimbabwe 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 2016
- 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 Zimbabwe 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.|
|Bond||A long term debt instrument issued by either: a company, institution or the government to raise funds.|
|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.|
|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.|
|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.|
|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||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.|
|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.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|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.|
|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.|
For a detailed glossary of terms please click here
GCR affirms African Banking Corporation of Zimbabwe Limited’s rating of BB+(ZW); Outlook Stable.