Johannesburg, 30 April 2018 — Global Credit Ratings has affirmed the national scale ratings assigned to CBZ Bank Limited of A(ZW) and A1-(ZW) in the long-term and short-term respectively; with the outlook accorded as Stable. The ratings are valid until April 2019.
SUMMARY RATINGS RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to CBZ Bank Limited (“CBZ Bank”, “the bank”), based on the following key criteria:
The ratings accorded to CBZ Bank reflect its strong business profile, given its leading market position in terms of total industry deposits and assets; strong capitalisation; improved profitability and liquidity metrics. Offsetting these key rating strengths is the weak asset quality, and a volatile and uncertain operating environment.
CBZ Bank is the largest commercial bank in Zimbabwe by total assets and customer deposits, with respective market shares of 21.0% and 22.7% at 31 December 2017. The bank is 100% owned by CBZ Holdings Limited (“the group”), with the government of Zimbabwe holding a 16% shareholding in the group.
The bank’s core capital base of USD159.6m at FY17, is strong and exceeds the current minimum regulatory requirement of USD25m, as well as the USD100m threshold set for compliance by 2020. CBZ Bank’s core capital grew by 3.9% at FY17, primarily through organic earnings growth. The bank’s capital adequacy ratio registered at 24.3% at FY17 (FY16: 22.3%), supported by a 5.5% decrease in risk weighted assets to USD740.1m due to a re-structuring of CBZ Bank’s assets. The bank’s capital adequacy ratio was well above the regulatory minimum of 12%.
CBZ bank’s asset quality has weakened with impairments increasing to USD103.9m (FY16: USD67.5m) and the gross NPL ratio increasing to 11.8% at FY17 (FY16: 7.3%), due to a challenging and volatile economic environment. Consequently, the net NPLs to total capital ratio increased to 32.5% at FY17 (FY:16: 20.7%). A strong capital buffer covers the bank’s high impairments, albeit a continued decline has potential to erode capital.
The bank exhibited short-term maturity mismatches in its asset/liability profile (in particular in the critical ‘0-30 days’ maturity). However, to manage liquidity risk, the bank holds high levels of liquid assets supported by a liquidity ratio of 43.4% at FY17, which is well above the regulatory minimum of 30%. The bank’s high depositor concentration and significant reliance on corporates and money market deposits exposes it to unexpected and large outflows, which can lead to liquidity stress.
The bank’s net profit before tax increased by 19.9% to USD24.0m in FY17, driven by a 35.3% increase in fee and commission income. The bank’s net interest margin contracted to 3.5% in FY17 (FY16: 3.9%), and its net interest income declined by 4.4% as a result of lower lending rates capped at 12% by the Reserve Bank of Zimbabwe. The bank also implemented various cost rationalisation measures, which resulted in a decrease in the cost ratio to 57.0% (FY16: 66.5%) in FY17. ROaE and ROaA increased to 14.9% (FY16: 12.0%) and 1.4% (FY16: 1.0%) in FY17 respectively.
The ratings have not factored in the financial consequences of a possible penalty from the United States Treasury office of Foreign Assets Control for violations of US sanctions on Zimbabwe (due to transactions pertaining to certain corporates on the sanctions list), which could have a material impact on the bank. However, GCR continues to monitor developments on the case.
A sustained improvement in the bank’s asset quality and earnings capacity, could positively impact the bank’s ratings. However, GCR sees limited scope for an upward movement of the bank’s ratings, considering the difficult operating environment. A negative change in the rating could result from a further weakening of the bank’s asset quality metrics, weak earnings generation and/or deterioration in the bank’s liquidity and solvency indicators.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (September 2000)|
|Long-term: A-(ZW); Short-term: A2(ZW)|
|Last rating (April 2017)|
|Long term: A(ZW); Short term: A1-(ZW)|
|Primary Analyst||Secondary Analyst|
|Simbarake Chimutanda||Victor Matsilele|
|Credit Analyst||Junior Credit Analyst|
|(011) 784-1771||(011) 784-1771|
|Senior Credit Analyst|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions (March 2017)
CBZ Bank rating reports (2000-17)
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 ratings was influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
CBZ Bank 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 CBZ Bank Limited with no contestation of the ratings.
Information received from CBZ Bank Limited and other reliable third parties to accord the credit ratings included:
- Audited financial results as at 31 December 2017 (and four years of comparative numbers);
- Budgeted financial statements for 2018;
- Latest internal and/or external audit report to management; and
- Industry comparative data.
The ratings above were solicited by, or on behalf of CBZ Bank 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
|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.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|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.|
|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.|
|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.|
|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.|
|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 detailed glossary of terms please click here
GCR affirms CBZ Bank Limited’s long-term rating of A(ZW); Outlook Stable.