Johannesburg, 19 Jun 2015 – Global Credit Ratings has today affirmed the national scale ratings assigned to African Banking Corporation Zambia Limited of BBB-(ZM) and A3(ZM) 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 Zambia Limited (“BancABC Zambia” and/or “the bank”) based on the following key criteria:
The ratings accorded to BancABC Zambia reflect its growing franchise value and proven support structure, with both financial and operational support provided by its parent company, ABCH Holdings Limited (“ABCH” and/or “the group”). During F14, ABCH was acquired by Atlas Mara Limited. The new shareholders are expected to drive the group’s next growth phase and stronger inroads into the retail sector, as well as provide much needed operational, capital and funding support.
BancABC Zambia is well capitalised with a total risk weighted capital adequacy ratio of 41.3% (FYE13: 45.1%) and Tier 1 ratio of 20.7% (FYE13: 22.6%) at FYE14, which were well above the statutory minima of 10% and 5% respectively.
However, the bank’s asset quality deteriorated significantly during F14, with gross non-performing loans (“NPLs”) to total gross loans escalating from 3.1% at FYE13 to 13.8% at FYE14. The decline was as a result of downgrading of large exposures to a few corporate borrowers amounting to c.68% of NPLs at FYE14. Pre-collateral, provisions covered 34.2% of gross NPLs, down from 104.3% in F13. Consequently, the net NPLs to capital ratio increased to 16.1% at FYE14, from a negative position in the previous year.
Pre-tax profit contracted (67.6%) from ZMK53.5m in F13 to ZMK17.3m in F14, mainly due to the four-fold growth in impairment charges on loans and advances, restrained loan growth, and significant reliance on expensive term funding.
Liquid assets (excluding statutory reserves and balances with related parties) amounted to 23.5% (FYE13: 36.2%) of short-term funding at FYE14. The liquidity ratio was maintained above the prudential minimum of 10% throughout F14.
A positive earnings trend while maintaining sound credit protection factors, further progress in broadening the funding base (on the back of the retail strategy and growth strategies from the new shareholders), a tighter provisioning policy, and a positive outcome on loan recovery efforts and arrears collections, may have a positive impact on the ratings. However, further weakening in earnings and asset quality (as reflected by NPLs in both nominal and percentage terms) and a drastic decline in liquidity and capital adequacy metrics, would place ratings under pressure. Furthermore, adverse economic developments on the back of a decline in commodity prices (given the Zambian economy’s dependence on copper) and a weak global market, could adversely impact the broader business environment and overall financial condition of the bank and the financial sector in general, necessitating additional negative rating action.
NATIONAL SCALE RATINGS HISTORY
Initial rating (Oct/2005)
Long term: BBB-(ZM); Short term: A3(ZM)
Last rating (Jun/2014)
Long term: BBB-(ZM); Short term: A3(ZM)
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
Zambia Bank Statistical Bulletin
BancABC Zambia 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 Zambia 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 Zambia 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
- Industry comparative and regulatory framework
The ratings above were solicited by, or on behalf of, African Banking Corporation Zambia 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||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|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.|
|Balance Sheet||Also known as a Statement of Financial Position. A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been financed.|
|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|Cap||A provision in a loan agreement that sets a limit on the interest rate which can be charged during the term of the loan.|
|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.|
|Corporate Governance||Corporate governance broadly 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||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.|
|Creditworthiness||An assessment of a debtor’s ability to meet debt obligations.|
|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.|
|Exchange||A standardised marketplace in which different assets are traded.|
|Exposure||Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For a company, its exposure may relate to a particular product class or customer grouping. Exposure may also arise from an overreliance on one source of funding.|
|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.|
|Income Statement||A summary of all the expenditure and income of a company over a set period.|
|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.|
|Liquid Assets||Assets, generally of a short term, that can be converted into cash.|
|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.|
|Off Balance Sheet||Off balance sheet items are assets or liabilities that are not shown on a company’s balance sheet. They are usually referred to in the notes to a company’s accounts.|
|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.|
|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.|
|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.|