Announcements

GCR affirms and withdraws Sasfin Holdings Limited’s rating of BBB+(ZA); Outlook Stable

Johannesburg, 23 June 2015 — Global Credit Ratings has affirmed the national scale ratings assigned to Sasfin Holdings Limited of BBB+(ZA) and A2(ZA) in the long term and short term respectively; with the outlook accorded as Stable. Furthermore, Global Credit Ratings has affirmed the international scale rating assigned to Sasfin Holdings Limited of BB+; with the outlook accorded as Stable. At the same time, Global Credit Ratings has withdrawn the ratings assigned to Sasfin Holdings Limited for its own business reasons.

SUMMARY RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit rating(s) to Sasfin Holdings Limited (“Sasfin” and/or “the group”) based on the following key criteria:

Sasfin’s ratings reflect its solid standalone financial strength, sound capitalisation, good recurring profitability, as well as satisfactory asset quality. However, the group’s ratings are constrained by its narrow franchise as a small, specialised corporate lender, and lacklustre domestic macroeconomic prospects.

The group has an established niche franchise within the entrepreneurial, institutional, corporate and private banking markets, servicing businesses/clients in South Africa’s major cities. With the group being the chief operating subsidiary of the group, Sasfin provides rental and trade equipment finance solutions, treasury services, private equity operations, and a wealth management offering, amongst others. Going forward, the recent launch of transactional banking services is expected to bolster the group’s growth plans and penetration of its niche.

F14 saw growth in earnings across all business segments, driven by growth in assets and client volumes. The increase in portfolios under management, together with investments in human capital in the wealth management division and greater funding earmarked for private equity deals, are expected to lead to more diversified income streams for the group.

While Sasfin’s capital ratios were slightly reduced relative to FYE13 (due to the adoption of new Basel 3 requirements and growth in risk-weighted assets), all regulatory capital minima were significantly exceeded. The group recorded a total capital adequacy ratio of 23% at FYE14 (FYE13: 26%), against a statutory minimum requirement of 10%.

Asset quality indicators improved in F14, supported by stringent lending criteria and higher recoveries. Sasfin’s non-performing loans (“NPLs”) declined by 18.3% to R157m at FYE14, resulting in its gross NPL ratio reducing to 3.9% (FYE13: 5.6%). Specific provisioning coverage stood at 50.7% at FYE14 (FYE13: 50.5%), with the balance covered by collateral.

Sasfin’s core profitability remained intact, with the group posting a return on average equity and assets of 15.2% and 2.2% in F14 respectively (F13: 15.5% and 2.6%). This has been supported by stable interest margins and growing fee income, balanced against a high cost base, mainly attributable to increases in staff numbers. Looking ahead, the group’s 1H F15 performance points to another positive full year.

Although around one quarter of Sasfin’s funding comprises debt securities, it is positively noted that the group continues to expand its customer deposit base. The group maintains sound liquidity buffers, evidenced by its Basel 3 liquidity coverage ratio of 267% at FYE14 (FYE13: 200%), which stood well above the minimum requirement of 60%.

Sasfin’s limited diversification, given its niche focus, limited scale and reliance on shareholder support, make an upgrade unlikely. The group’s ratings could benefit from significantly increased funding/earnings diversification and market share. On the other hand, deterioration in operating conditions, increased competition, and/or a material decline in the group’s profitability and asset quality indicators could negatively affect its ratings.

The ratings above are unsolicited and accorded based on publicly available information.

NATIONAL SCALE RATINGS HISTORY   INTERNATIONAL SCALE RATING HISTORY
     
Initial rating (Dec/2006)   Initial rating (June/2013)
Long term: BBB+(ZA); Short term: A3(ZA)   Long-term: BB+
Outlook: Stable   Outlook: Stable
     
Last rating (July/2014)   Last rating (July/2014)
Long term: BBB+(ZA); Short term: A2(ZA)   Long-term : BB+
Outlook: Stable   Outlook: Negative

ANALYTICAL CONTACTS

Primary Analyst   Committee Chairperson
Kuzivakwashe Murigo   Omega Collocott
Credit Analyst   Sector Head: Financial Institution Ratings
(011) 784-1771   (011) 784-1771
murigo@globalratings.net   omegac@globalratings.net

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Global Criteria for Rating Banks and Other Financial Institutions, updated March 2015

South Africa Bank Bulletin (2014)

Sasfin rating reports (2006-14)

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; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.

The credit rating(s) above were not solicited by, or on behalf of, the rated client, and therefore, GCR has not been compensated for the provision of the rating(s). The ratings were accorded based on publicly available information.

The credit rating(s) above were disclosed to Sasfin Holdings Limited with no contestation of/changes to the ratings.

Sasfin Holdings Limited did not participate in the rating process, though GCR is satisfied that the public information available was sufficient.

The information used to analyse Sasfin Holdings Limited and accord the credit rating(s) included the 30 June 2014 audited financial statements (plus four years of comparative numbers); 31 December 2014 interim results; banking sector information (as supplied in the BA900 Reserve Bank of South Africa reports); and other publicly available information.

GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S FINANCIAL INSTITUTIONS GLOSSARY

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.
Basel Basel Committee on Banking Supervision housed at the Bank for International Settlements.
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.
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.
Customer Deposit Cash received in exchange for a service, including safekeeping, savings, investment, etc. Customer deposits are a liability in a bank’s books.
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.
Diversification Spreading risk by constructing a portfolio that contains different investments, whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.
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.
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.
Franchise Business or banking franchise; a bank’s business.
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.
International Scale Rating ISRs relate to either foreign currency or local currency commitments, assessing the capacity of an issuer to meet these commitments using a globally applicable (and therefore internationally comparable) scale.
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.
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 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.
NPL Ratio The ratio of non-performing loans and advances to total gross loans and advances, expressed as a percentage.
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.
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.
Principal The total amount borrowed or lent, e.g. the face value of a bond, excluding interest.
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.
Risk-Weighted Assets RWAs are determined by applying risk weights to balance sheet assets and off-balance-sheet financial instruments according to the relative credit risk of the counterparty. The risk weighting for each balance sheet asset and off-balance-sheet financial instrument is governed by the respective regulatory authorities.
Securities Various instruments used in the capital market to raise funds.
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.

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