Johannesburg, 31 October 2016 — Global Credit Ratings has affirmed the national scale ratings assigned to Agriculture Bank of Zimbabwe Limited of B+(ZW) and B(ZW) in the long-term and short-term respectively; with the outlook accorded as Stable. The ratings are valid until October 2017.
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 reflect its high degree of past due loans, and the challenges faced in arresting asset quality deterioration in a difficult macro-economic environment. Improvements in capitalisation and profitability are positively noted, but prospects remain subject to high forecast risk. The Government of Zimbabwe (“government”), with 100% ownership of the bank, is likely to provide support for the bank in case of need, as demonstrated historically and given the fact that Agribank is government’s primary vehicle for channelling financial resources to the country’s agricultural sector. However, while the government is committed to support agriculture development, cognisance is taken of its weak financial capacity.
In the 18 months to 1H F16, the bank’s Tier 1 and total regulatory capital increased 4.4x and 3.2x to USD33.8m (above the minimum statutory core capital requirement of USD25m) and USD46.4m respectively, following a USD30m capital injection by the government through treasury bills (“TBs”), coupled with a retention of USD2.2m profit in 1H F16. On a risk adjusted basis, the bank’s Tier 1 and total capital adequacy ratios rose (“CARS”) to 19.7% (FYE14: 5.3%) and 27.0% (FYE14: 10.0%) at 1H F16 respectively. This came after both the absolute quantum of capital and CARS had dropped below regulatory minima due to recurring losses.
Asset quality metrics remain weak, despite the bank’s efforts to clean up its loan book and the decline in non-performing loans (“NPLs”) due to disposals to the Zimbabwe Asset Management Company (“ZAMCO1”) and write-offs. At 1H F16, the bank recorded a gross NPL ratio of 22.4% (FYE15: 28.3%; F14: 35.5%), while its total past due loans accounted for 37.6% of gross loans (FYE15: 46.2%; FYE14: 62.2%). That said, provisioning levels remain low relative to peers and asset quality risk, with specific provisions covering only 13.3% of NPLs at 1H F16 (FYE15: 23.4%).
Following four years of consecutive losses, the bank posted a profit after tax of USD2.2m in 1H F16, supported by an increase in operating income, as well as a decrease in operating expenses subsequent to the completion of a staff and cost rationalisation exercise, coupled with a decline in impairment charges (reflecting the sale of NPLs to ZAMCO). However, looking ahead, earnings generation may be negatively impacted by additional impairment charges that may become necessary, given the considerable stresses in the local market.
Agribank’s liquidity position improved following the mobilisation of agro bills, and the capital injection, which ensured access to interbank funding. However, the bank’s liquid asset base (assets with a maturity of less than 12 months) is still considered low, with a liquid assets to total assets ratio of 10.2% at 1H F16 (FYE15: 3.4%). Furthermore, liquidity risk has increased sector-wide due to domestic liquidity stress, increased appetite for hard currency by retail clients and the absence of a lender of last resort. Agribank (together with all the banks in the market) has placed daily limits on ATM withdrawals and increased the provision of point of sale (“POS”) machines and transaction cards to manage its cash balances and liquidity position.
An upward movement in the bank’s ratings could arise from substantial and sustainable improvements in asset quality, solvency and profitability. An inability to arrest asset quality challenges, and/or a decline in capitalisation and profitability, or further adverse economic developments, could see the ratings come under pressure.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (August 2006)|
|Long-term: BBB-(ZW); Short-term: A3(ZW)|
|Last rating (October 2015)|
|Long-term: B+(ZW) ; Short-term: B(ZW)|
|Primary Analyst||Committee Chairperson|
|Kuzivakwashe Murigo||Jennifer Mwerenga|
|Credit Analyst||Senior Credit Analyst|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2016
Zimbabwe Bank Statistical Bulletin (June 2016)
Agribank rating reports (2006-15)
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.
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 with no contestation of the ratings.
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 2015 (and three years of comparative numbers)
- Unaudited interim results at 30 June 2016
- 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 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).|
|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.|
|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 Agency||An entity that provides credit rating services.|
|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.|
|Forecast||A calculation or estimate of future financial events.|
|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.|
|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.|
|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.|
|Treasury Bill||Short-term obligation backed by the government that bears no interest and is sold at a discount.|
For a detailed glossary of terms utilised in this announcement please click here
GCR affirms Agriculture Bank Zimbabwe Limited’s rating of B+(ZW) ; Outlook Stable.