Johannesburg, 29 October 2018 — Global Credit Ratings has affirmed the national scale ratings assigned to Agricultural Bank of Zimbabwe Limited of BB-(ZW) and B(ZW) in the long-term and short-term respectively; with the rating placed on negative rating watch.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Agricultural Bank of Zimbabwe Limited (“Agribank”, “the bank”), based on the following key criteria:
The ratings of Agribank benefit from its strong capitalisation which is being supported by improving profitability, its role as Zimbabwe’s primary agricultural bank, and deposit led funding with appropriate liquidity. The ratings are constrained by its weak asset quality, low market share and a weak operating environment.
The Negative Rating Watch follows the monetary and fiscal policy reforms announcement made under the Transitional Stabilisation Programme by the relevant authorities on the 5th of October 2018, which we expect to have a broad negative impact on the economy and the banking sector. We hope to resolve the negative ratings watch within a 3-6 month period, once we have a clearer view of the impact of the below. Upside rating potential is limited, outside a substantial improvement in the macroeconomic environment. A negative rating action could follow evidence of weakening shareholder support, deterioration in asset quality and/or the financial profile.
The bank is considered strongly capitalised. Capital Adequacy Ratio (“CAR”) as at FY17 improved to 38.6% (FY16: 36.2%), which was above the industry average of 36.6%. The growth in CAR follows the effort of the shareholder to capitalise the bank and to an extent the result of the bank’s cautious approach to lending. The shareholder has authorised the bank to engage a strategic partner to help capitalise the bank, and management has highlighted that significant progress has been made to this regard. Internal capital generation is also improving, benefitting from the rapid growth of non-funded income generated by the increase in digital transactions.
Agribank benefits from being the preferred distribution partner by the government for agriculture related financing. The bank also benefits from partnership deals with other financial institutions who seek exposure to the agriculture sector due to their expertise, knowledge of the sector and extensive infrastructure. Notwithstanding the above, Agribank is a fully- fledged commercial bank offering a range of retail and commercial banking services.
The bank’s risk position is weak relative to its peers. The bank’s gross Non-Performing Loans ratio improved from a four-year average of 28.5% to 9.9% as at August FY18 but largely on the back of aggressive write offs. The bank has low loan loss coverage at 55% of total loans. GCR is also concerned with potential asset quality deterioration because of the volatile operating environment and projections of below average rainfall for the 2019 farming season. Positively, single name obligations are low. The bank’s top 20 credit exposures accounted for 21.4% at FY17 (FY16: 31.4%).
The bank’s funding is considered stable with deposits, the main source of funding increasing to USD171.9m at FY17 (FY16: USD84.7m). However, the skew to corporate deposits and lines of credit negatively impacted the bank’s cost of funding. The bank’s liquidity improved over the review period.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (August 2006)|
|Long-term: BBB-(ZW); Short-term: A3(ZW)|
|Last rating (October 2017)|
|Long-term: BB-(ZW) ; Short-term: B(ZW)|
|Primary Analyst||Secondary Analyst|
|Simbarake Chimutanda||Kudzanai Samanga|
|Credit Analyst||Junior Credit Analyst|
|(011) 784-1771||(011) 784-1771|
|Sector Head: Financial Institutions Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2017
Agribank rating reports (2006-17)
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.
Agricultural Bank of Zimbabwe Limited participated in the rating process via face-to-face management meetings 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 Agricultural Bank of Zimbabwe Limited.
Information received from Agricultural Bank of Zimbabwe 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 interim results at 30 June 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 Agricultural Bank 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.|
|Audit Report||A written opinion of an auditor (attesting to the financial statements’ fairness and compliance with generally accepted accounting principles).|
|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.|
|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.|
|Cost Ratio||The ratio of operating expenses to operating income. Used to measures a bank’s efficiency.|
|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.|
|Facility||The grant of availability of money at some future date in return for a fee.|
|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.|
|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.|
|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.|
|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.|
|Past Due||Any note or other time instrument of indebtedness that has not been paid on the due date.|
|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.|
|Regulatory Capital||The total of primary, secondary and tertiary capital.|
|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.|
|Tier 1 Capital||Primary capital consists of issued ordinary share capital, hybrid debt capital, perpetual preference share capital, retained earnings and reserves. This amount is then reduced by the portion of capital that is allocated to trading activities and other regulatory deductions.|
For a detailed glossary of terms please click here
GCR affirms Agricultural Bank of Zimbabwe Limited’s rating of BB-(ZW); Negative Ratings Watch.