Johannesburg, 10 July 2019 – GCR Ratings (“GCR”) has affirmed the national scale ratings assigned to African Banking Corporation (Mocambique) S.A. (“BancABC Moçambique,” the bank”) of BB+(MZ) and B(MZ) in the long term and short term respectively; with the outlook accorded as Stable.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook / Watch|
|African Banking Corporation (Moçambique) S.A.||Issuer Long Term||National||BB+(MZ)||Stable|
|Issuer Short Term||National||B(MZ)||–|
The rating on BancABC Moçambique reflects adequate capitalization, a relatively concentrated funding base, albeit backed by adequate levels of liquidity, high but improving levels of non-performing loans, and a modest competitive position.
BancABC Moçambique is considered to be adequately capitalised, an opinion supported by a GCR Capital ratio of 19%. Despite loan loss reserves covering 78.3% of gross non-performing assets at FY18, which we consider to be broadly appropriate, nominal capital was adjusted for the shortfall in reserving in line with the regulatory deductions from tier one. We also negatively view the bank’s earnings capacity and quality on the back of low inefficiency as indicated by a high cost to income ratio of 116.9% at Mar-19 (Dec-18: 99.4%) and recoveries driving profitability in FY18. As a result, we expect the GCR capital ratio to range between 17%-19% over the next 12 months.
We consider the bank’s funding structure to be concentrated and somewhat volatile. The top twenty accounted for about 55% of total deposits at FY18. Furthermore, the funding base continues to have a high presence of financial corporate (c30% of total deposits) and public entity deposits, which we opine to be inherently less stable than retail or corporate funds. We positively view the growth of agency banking led retail deposits over the past 12 months, however the contribution and stability of such funds needs to be proven over more time. Until then, we expect cost of funds to remain elevated at around 11% – 13% as at FY19 (FY18: 11.5%; FY17: 14.1%).
BancABC Moçambique’s risk profile is consider a rating’s negative, but it is showing significant improvement in 2019. The bank’s non-performing loans ratio is expected to improve to around 13%-14% at end FY19, largely due to sale and recovery of bad debts. Nevertheless, we expect credit losses to normalize between 2.5% to 3.5% through the cycle because we do not think that the underlying quality of the loan book will change significantly going forward. Positively, BancABC Moçambique’s total loan book is fairly diversified, in our view.
BancABC Moçambique’s business profile is viewed negatively. The bank’s franchise is modest as reflected by a small market share of less than 2%, high cost of funds and relative volatility in revenues. Looking ahead, we expect the bank’s franchise strength and general competitiveness to improve over the medium to long-term, post the expected equity swap between Atlas Mara and Equity Group Holdings (formerly Equity Bank Group). We believe that the bank will continue to receive support from ABCH until it is transferred to Equity Bank Group.
Our Stable Outlook balances the expected reduction in non-performing loans through 2019/20, and adequate levels of capitalisation, with the relatively weak earnings capacity and improving funding structure of the bank. We also factor in either a new parent, in the form of Equity Bank Group which will be supportive of the bank or continued support from the existing shareholder.
Positive rating action: A sustained improvement in the bank’s funding structure, including lower cost of funds, and establishing a better lending track-record could result in upward rating movement.
Negative rating action: A further weakening in the funding structure, capital erosion, deterioration in liquidity and a retrogressing risk profile could result in negative rating action.
|Primary analyst||Nyasha Chikwengo||Financial Institutions Analyst|
|Johannesburg, ZA||nyashac@GCRratings.com||+27 11 784 1771|
|Committee chair||Mathew Pirnie||Sector head: — Financial Institutions|
|Johannesburg, ZA||mathewp@GCRratings.com||+27 11 784 1771|
Related Criteria and Research
|Criteria for the GCR Ratings Framework, May 2019|
|Criteria for Rating Financial Institutions, May 2019|
|GCR Country Risk Scores, June 2019 GCR|
African Banking Corporation (Moçambique) S.A
|Rating class||Review||Rating scale||Rating class||Outlook||Date|
|Issuer Long Term||Initial||National||BBB-(MZ)||Stable||December 2004|
|Issuer Short Term||Initial||National||A3(MZ)||–||December 2004|
RISK SCORE SUMMARY
|Country risk score||1|
|Sector risk score||2|
|Management and governance||0|
|Capital and Leverage||0|
|Funding structure and Liquidity||-1|
|National Scale Rating||BB+(MZ)|
|Capital||The sum of money that is invested to generate proceeds.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|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.|
|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.|
|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.|
SALIENT POINTS 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 has been disclosed to African Banking Corporation (Moçambique) S.A. The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating.
African Banking Corporation (Moçambique) S.A 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 information received from African Banking Corporation (Moçambique) S.A and other reliable third parties to accord the credit rating included:
- Audited financial results of African Banking Corporation (Moçambique) S.A