Johannesburg, 29 Nov 2016 – Global Credit Ratings has affirmed the national scale ratings assigned to Capricorn Investment Group Limited* of AA(NA) and A1+(NA) in the long term and short term respectively; with the outlook accorded as Stable. Global Credit Ratings has also affirmed the national scale ratings assigned to Bank Windhoek Limited of AA(NA) and A1+(NA) in the long term and short term respectively; with the outlook accorded as Stable. Furthermore, Global Credit Ratings has affirmed the long term South African national scale (Rand) issuer rating of A+(ZA) assigned to Bank Windhoek Limited; with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Capricorn Investment Group Limited (“Capricorn Group”, “the Group”) and Bank Windhoek Limited (“BW”) based on the following key criteria:
The ratings of Capricorn Group reflect its strong market position in the Namibian banking industry and significant presence in the insurance and asset management markets, as well as its stable capitalisation and earnings generation, adequate risk management framework and conservative risk appetite. While GCR expects the Group to remain resilient, the prevailing domestic macroeconomic challenges (including significantly weaker forecasts for real GDP growth) and an uncertain global economic outlook, increases downside risk for Capricorn Group’s (and the financial sector in general) asset quality metrics and earnings generation. The South African national scale rating may also be influenced by the relative sovereign ratings of South Africa and Namibia and the Group’s credit quality relative to the South African peer universe.
The Group’s leading operating subsidiary, Bank Windhoek Limited (“BW”), is the largest locally owned bank and second largest commercial bank in Namibia. BW contributed 98.2% (FYE15: 98.1%) of the Group’s consolidated assets at FYE16 and 86.6% (FYE15: 88.9%) of pre-tax profits. Other non-banking subsidiaries (offering insurance brokerage, property development, asset management and unit trust management products and services) contributed the balance. As such, the Group’s ratings largely replicate the banking subsidiary’s ratings.
The ratings also reflect the high probability of support from the Namibian authorities, if required, based on BW’s high systemic importance, stemming from its substantial market shares (about 30.6% and 29.4% by assets and deposits respectively at 30 June 2016).
The Group maintained a strong capital position on a consolidated basis as measured by the Bank of Namibia’s capital adequacy requirements for banking groups. Capricorn Group reported a total risk weighted capital adequacy ratio of 15.8% at FYE16 (FYE15: 15.8%) and Tier 1 risk based capital ratio of 14.3% (FYE15: 13.7%), which were well above the regulatory minima of 10% and 7% respectively, providing a sufficient buffer to absorb credit losses.
Capricorn Group’s overall asset quality remains sound despite a 36.2% increase in non-performing loans (“NPLs”) at FYE16 (FYE15: 87.2%). The increase was mainly due to the downgrade of a large corporate exposure to loss category. Accordingly, the gross NPL ratio rose to 1.3% at FYE16 from 1.1% at FYE15. Specific provisions covered 33.3% of NPLs at FYE16 (FYE15: 38.9%), with the remaining exposure covered by collateral. The Group’s unreserved NPLs relative to regulatory capital ratio remained low (5.6%) at FYE16. Looking ahead, the Group will remain cautious and vigilant in growing its quality loan portfolio and continue to focus on sound credit management practices to contain NPL formation.
The Group has posted stable earnings performance with a five year profit after tax CAGR of 22.5%. Profitability indicators improved in F16 with consolidated ROaE and ROaA increasing to 22.9% (F15: 22.4%) and 3.0% (F15: 2.8%) respectively.
Structural funding concentration and liquidity mismatches reflect the concentration risk in Namibia’s economy. Funding concentration raises liquidity risk, but strong mitigants, including monitoring and strategies to identify/manage liquidity risk (including unutilised funding lines and liquidity buffers), are in place.
Additional franchise entrenchment, strong liquidity and loss-absorption buffers and steady operating metrics throughout the economic cycle will further strengthen the Group’s financial profile. However, the Group’s significant market position, strong credit profile and high probability of state support limits the likelihood of rating changes over the medium term. A sharp deterioration in the capital position, liquidity, earnings and asset quality, could see the ratings come under pressure.
*Formerly Bank Windhoek Holdings Limited.
|NATIONAL SCALE RATINGS HISTORY||SOUTH AFRICAN NATIONAL SCALE RATINGS HISTORY|
Capricorn Investment Group Limited
|Initial rating (November 2015)|
|Long term: AA(NA); Short term: A1+(NA)|
|Last rating (January 2016)|
|Long term: AA(NA); Short term: A1+(NA)|
|Bank Windhoek Limited
Initial rating (September 2005)
Initial rating (November 2013)
|Long term: AA(NA); Short term: A1+(NA)||Long term: A-(ZA)|
|Outlook: Stable||Outlook: Stable|
|Last rating (January 2016)||Last rating (January 2016)|
|Long term: AA(NA); Short term: A1+(NA)||Long term: A+(ZA)|
|Outlook: Stable||Outlook: Stable|
|Primary Analyst||Committee Chairperson|
|Jennifer Mwerenga||Omega Collocott|
|Senior Analyst||Sector Head: Financial Institution Ratings|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2016
BW rating reports (2005-15)
BWH rating report (2015)
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.
Capricorn Investment Group Limited and Bank Windhoek Limited 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 credit ratings have been disclosed to Capricorn Investment Group Limited and Bank Windhoek Limited with no contestation of the ratings.
- Audited financial results of the Group and the banking subsidiary as at 30 June 2016 (plus four years of comparative figures)
- Budgeted financial statements for 2017
- Latest internal and/or external audit report to management
- Reserving methodologies
- A breakdown of facilities available and related counterparties
- Corporate governance and enterprise risk framework
- Industry comparative and regulatory framework
The ratings above were solicited by, or on behalf of, Capricorn Investment Group Limited and Bank Windhoek 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 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.|
|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.|
|Downgrade||The assignment of a lower credit rating to a company or sovereign borrower’s debt by a credit rating agency. Opposite of upgrade.|
|Exposure||Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For a company, its exposure may relate to a particular product class or customer grouping. Exposure may also arise from an overreliance on one source of funding.|
|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.|
|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.|
|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.|
|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.|
|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.|
For a detailed glossary of terms utilised in this announcement please click here
GCR affirms Capricorn Investment Group Limited’s and Bank Windhoek Limited’s ratings of AA(NA); Outlook Stable.