Johannesburg, 31 May 2017 — Global Credit Ratings (“GCR”) has affirmed Barclays Bank of Zimbabwe Limited’s long-term and short-term national scale ratings of AA-(ZW) and A1+(ZW) respectively; with the outlook accorded as Negative. The ratings are valid until May 2018.
SUMMARY RATINGS RATIONALE
The ratings of Barclays Bank of Zimbabwe Limited (“Barclays” and/or “the bank”) reflect its very strong asset quality, liquidity metrics, and solid capital adequacy supported by an improved financial performance over the review period despite a challenging operating environment (characterised by weak economic activity, and cash/foreign currency shortages).
Currently, the bank’s ratings are underpinned by the profile and commitment of the bank’s majority shareholder, Barclays Bank Plc (“the parent”, “the group”). However, the parent’s intended divesture of its controlling stake in the bank, signals reduced commitment, and Barclays’ limited strategic importance to the group. Furthermore, ambiguity over future ownership of the bank and the parent’s strategic direction introduces further uncertainty regarding the bank’s strategy and support environment.
The bank remains well capitalised. Core capital increased by 24% to USD57.4m augmented by organic growth (with 100% earnings retention). Consequently, the bank’s Tier 1 and total capital adequacy ratios increased to 16.5% and 22.4% respectively at FY16 (FY15: 12.8%; 18.4%), remaining well above the regulatory minima of 8% and 12% correspondingly. That said, to meet the statutory required core capital of USD100m by 2020, shareholders may be required to inject capital should the bank’s internal capital generation decline. However, capital support from shareholders is uncertain given the potential for shareholder changes. Furthermore, the impact of IFRS 9, which is still being evaluated by the bank, is expected to reduce Barclays’ capitalisation in 2018 (the quantum of which depends on final clarity regarding its implementation phasing).
Credit risk is considered high in view of the fragile operating environment which has seen most economic sectors struggle. To mitigate this risk, the bank adopted a cautious and highly selective approach to lending, and proactively tightened its credit granting criteria. Consequently, the bank recorded a low gross non-performing loan ratio of 1.6% against the industry average of 7.9%. Arrears coverage (by specific provisions) increased to 83.3% at FY16 (FY15: 48%), pre-collateral.
Despite a 10.7% increase in operating expenditure, Barclays’ net profit before tax more than doubled in FY16 to USD14.4m (FY15: USD5.8m), largely driven by non-interest income growth of 36.3%. Although the bank’s cost to income ratio declined to 73.2% at FY16 (FY15: 83.8%), it is still considered high (when compared to peers). Overall, profitability as measured by ROaA and ROaE increased to 2.8% and 18.1% respectively in FY16 (FY15: 1.3% and 7.5%).
The bank’s funding profile continues to be supported mainly by its large corporate deposit book, and remains susceptible to external shocks, given its reliance on transitory and relatively volatile wholesale deposits, exacerbated by the aforementioned challenging operating environment. To manage liquidity risk, the bank maintains high levels of liquidity evidenced by the prudential liquidity ratio which was well above the statutory minimum of 30% and the banking sector average of 45.4%.
An improvement in the operating environment, significant gains in market share, as well as sustained improvements in balance sheet strength, while maintaining healthy profitability, could positively impact the ratings. Downward pressure on Barclays’ ratings could stem from deterioration in asset quality, long-term earnings and capitalisation. In addition, the bank’s ratings would be impacted by a weakened shareholder support.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (September 2000)||Last rating (May 2016)|
|Long-term: AA-(ZW); Short-term: A1+(ZW)||Long term: AA-(ZW); Short term: A1+(ZW)|
|Outlook: Stable||Outlook: Negative|
|Senior Credit Analyst|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions (March 2017)
Zimbabwe Bank Statistical Bulletin (December 2016)
Barclays rating reports (2000-16)
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.
Barclays 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 Barclays Bank of Zimbabwe Limited with no contestation of the ratings.
Information received from Barclays Bank of Zimbabwe and other reliable third parties to accord the credit ratings included:
- Audited financial results as at 31 December 2016 ( and four years of comparative numbers)
- Budgeted financial statements for 2017
- Latest internal and/or external 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, the rated client, 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||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.|
|Collateral||Asset provided to a creditor as security for a loan.|
|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.|
|Credit Rating Agency||An entity that provides credit rating services.|
|Customer Deposit||Cash received in exchange for a service, including safekeeping, savings, investment, etc. Customer deposits are a liability in a bank’s books.|
|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.|
|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.|
|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.|
|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.|
|Net Profit||Trading/operating profits after deducting the expenses detailed in the profit and loss account (including taxes).|
|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.|
|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 Management||Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy.|
|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.|
For a glossary of terms please click here
GCR affirms Barclays Bank of Zimbabwe Limited’s rating of AA-(ZW); Outlook Negative.