Announcements

GCR affirms African Banking Corporation (Tanzania) Limited’s rating of BB(TZ); Outlook Stable.

Johannesburg, 27 June 2016 — Global Credit Ratings has affirmed the national scale ratings assigned to African Banking Corporation (Tanzania) Limited of BB(TZ) and B(TZ) in the long-term and short-term respectively; with the outlook accorded as Stable. The ratings are valid until June 2017.

SUMMARY RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit ratings to African Banking Corporation (Tanzania) Limited (“BancABC Tanzania”, “the bank”) based on the following key criteria:

The ratings of BancABC Tanzania reflect it’s still weak but improving asset quality metrics and the vulnerability of its capital to problem assets. The rating also takes into account demonstrated shareholder support and ongoing efforts to turn the bank around, including the introduction of a new management team in 2015. The ‘Stable’ rating outlook also assumes that management will continue to focus on managing down the bank’s problem assets and the recovery in operating performance, a trend already visible at end-2015.

During F14, the bank’s parent, ABC Holdings Limited (“ABCH”), was acquired (98.7% equity stake) by Atlas Mara Limited (“Atlas Mara”, “the group”). 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.

The bank has regularised its capital breaches, reporting a capital adequacy ratio of 14.3% at FYE15 (FYE14: negative 4.3%), against a regulatory minimum of 12%. This followed a capital injection of TZS34.8bn (USD20m) from Atlas Mara in 4Q 2014, and a further TZS14.3bn (USD7m) in 2015.

Although registering significant improvement in F15, asset quality remains a key rating concern with impaired loans registering a high 27.4% of gross loans at FYE15 (FYE14: 36.5%). Impaired loans include legacy loans amounting to TZS39.6bn at FYE15 (71.9% of total impaired loans). In June 2013, the bank transferred legacy non-performing loans (“NPLs”) with a carrying value of TZS51bn to Tanzania Development Finance Company Limited (“TDFL”), a special purpose vehicle owned by the parent. The TDFL exposure was partly paid for in cash (USD9m/TZS13.7bn), while the remaining balance is carried as part of BancABC Tanzania’s loans and advances to customers. Notwithstanding this, progress is slow in cleaning up the portfolio of legacy loans. Excluding the TDFL exposure, the gross NPL ratio amounted to 9.6% at FYE15 (FYE14: 19.3%) partly due to 19.6% growth in loans, enhanced loan monitoring, write-offs, restructurings and repayments. Total NPLs net of provisions were a high 103.4% of regulatory capital at FYE15 (regulatory capital was negative in F14). During 2015, the new shareholders conducted a comprehensive review of the credit lifecycle management process at banking subsidiaries, following which the group has now 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.

The bank recorded a small pre-tax profit of TZS87.4m in F15, breaking a four year trend of losses. The improvement was mainly linked to loan growth, lower credit risk costs, and cost containment measures. Direct funding and liquidity risks are partly ameliorated through maintaining a liquid balance sheet and holding reserves in highly tradeable instruments and money market placements. Cash and liquid assets (excluding statutory reserves balances) amounted to 47.6% (FYE14: 41.0%) of short term funding at FYE15 (the minimum statutory liquidity ratio is 20%).

A sustained improvement in asset quality metrics (including substantial progress in NPL workouts), positive earnings trend, further strengthening of capital buffers, more stable and diversified funding/liquidity profile and improved credit underwriting, could lead to an upward ratings migration. Conversely, renewed capital pressure driven by additional credit losses on legacy problem exposures or elevated NPL generation in new lending, a deterioration in earnings and liquidity indicators, and adverse macroeconomic developments, could see the ratings come under pressure.

NATIONAL SCALE RATINGS HISTORY    
     
Initial rating (November 2009)    
Long-term: BBB-(TZ); Short-term: A3(TZ)    
Outlook: Negative    
     
Last rating (June 2015)    
Long-term: BB(TZ); Short-term: B(TZ)    
Outlook: Stable

   

ANALYTICAL CONTACTS

Primary Analyst   Committee Chairperson
Jennifer Mwerenga   Omega Collocott
Senior Credit Analyst   Sector Head: Financial Institution Ratings
(011) 784-1771   (011) 784-1771
jennifer@globalratings.net   omegac@globalratings.net

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Global Criteria for Rating Banks and Other updated March Financial Institutions, updated March 2016

Tanzania Bank Statistical Bulletin (November 2015)

BancABC Tanzania rating reports (2009-15)

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 (Tanzania) 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 have has been disclosed to African Banking Corporation (Tanzania) Limited with no contestation of the ratings.

The information received African Banking Corporation (Tanzania) Limited 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 (Tanzania) 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

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.
Bad Debt An amount owed by a debtor that is unlikely to be paid due, for example, to a company going into liquidation. There are various technical definitions of what constitutes a bad debt, depending on accounting conventions, regulatory treatment and the individual entity’s own provisioning and write-off policies.
Basel Basel Committee on Banking Supervision housed at the Bank for International Settlements.
Basel I Basel Committee regulations, which set out the minimum capital requirements of financial institutions with the goal of minimising credit risk.
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.
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.
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.
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. 
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.
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.
Performing Loan A loan is said to be performing if the borrower is paying the interest on it on a timely basis.
Portfolio A collection of investments held by an individual investor or financial institution. They may include stocks, bonds, futures contracts, options, real estate investments or any item that the holder believes will retain its value.
Provision The amount set aside or deducted from operating income to cover expected or identified loan losses.
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 utilised in this announcement please click here

GCR affirms African Banking Corporation (Tanzania) Limited’s rating of BB(TZ); Outlook Stable.

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