Rating Action
Johannesburg, 28 July 2020 – GCR Ratings (“GCR”) has affirmed CBZ Bank Limited’s national scale long term issuer and short term issuer ratings of A+(ZW) and A1(ZW) respectively, with an Evolving Outlook.
| Rated Entity | Rating class | Rating scale | Rating | Outlook/Watch |
| CBZ Bank Limited | Long Term issuer | National | A+(ZW) | Evolving Outlook |
| Short Term issuer | National | A1(ZW) |
Rating Rationale
As the core operating entity, the analysis on CBZ Bank Limited (“CBZ Bank”) reflects the strengths and weaknesses of the wider CBZ Holdings Limited Group (“the Group”). The ratings take into account the Group’s sound business profile supported by good levels of business diversification, franchise strength, and above average market shares. Furthermore the ratings also reflect adequate though constrained capitalisation, a relatively stable funding structure and appropriate local currency liquidity, offset by a weaker risk position in comparison to domestic top tier banks. The outlook is reflective of the adverse operating conditions exacerbated by a hyperinflationary environment and unstable monetary policy resulting in a more volatile financial profile. The outlook is also restrained by the adverse unquantified ramifications of the on-going COVID-19 pandemic on the environment.
The business profile is a ratings positive. The Group has a strong competitive position in comparison to rated peers supported by above average market share and stronger than average business line diversification given its broad financial services offering. In 2019, the Group expanded its offering further through a newly formed subsidiary, CBZ Agro Yield, which offers contract farming loans both to individual and commercial farmers. Revenue stability and creation is broadly in-line with banking sector peers, GCR notes an increasing dependency on market sensitive income sector wide. CBZ Bank is one of the largest banks in Zimbabwe by advances, deposits and profitability and we expect CBZ Bank to remain in the top 3 banks of choice over the rating horizon. In the above consideration, GCR takes into account the high risk of value erosion of the monetary assets as a result of hyperinflation. Management and governance is neutral to the ratings.
Capitalisation is adequate supported by a high GCR leverage ratio, offset by relatively weaker earnings quality characterised by high amounts of market sensitive income. The Group’s GCR leverage ratio was 11.7% at 31 December 2019 and is expected to range between 11 % and 13% given the current dynamics. Earnings quality is a moderate ratings negative reflected by revenue stability risk characterised by high source concentration and a material exposure to market sensitive income which is susceptible to the volatile monetary policy. GCR also takes note of downward risk associated with the moderately high probability of undercapitalized subsidiaries by 31 December 2020 and increasing regulatory nominal USD capital risk. We expect the bank to sustain profitability taking into account constrained earnings capacity and lower internal capital generation driven by the impact of hyperinflation on the net monetary asset balance sheet. Reserving of stage 3 and stage 2 loans at 31 December 2019 was deemed adequate.
The risk profile is relatively weaker than top tier rated peers. The Group recorded an improvement in asset quality in 2019 recording a gross non-performing loan ratio of 3.2% at 31 Dec 2019 (FY18: 16.7%). However, initial assessments of the potential impact of the COVID-19 pandemic indicate that the bank and Group will not be immune to the sector wide challenges which include credit extension and loan repayments. Though not significant, we expect some deterioration in asset quality. Furthermore, concentration risk (sovereign risk) is considered very high. The bank has higher than average asset exposure to the government in the form of securities, guarantees and loan exposures.
Funding and liquidity is a ratings neutral taking into account an average funding structure and adequate local currency liquidity. The bank is exposed to the same structural funding as most banks in Zimbabwe, namely demand customer deposits. At 30 June 2020, the bank had relatively high single name concentrations and very high counterparty risk. The bank remains susceptible to external shocks, given its reliance on transitory and relatively volatile wholesale deposits. This is further exacerbated by the challenging operating environment and foreign currency shortages. However, local currency liquidity was good mitigating structural funding risks. The bank will benefit from increasing its foreign currency funding sources and liquid assets to assist in expunging the remaining legacy debt and other foreign obligations.
Outlook Statement
The outlook is evolving premised on the volatile operating environment, monetary policy, exacerbated by hyperinflation creating high likelihood of frequent change on the financial profiles of financial institutions operating therein. In this regard, GCR will increase monitoring and surveillance of rated peers.
Rating Triggers
National scale ratings reflect relativities to the local Zimbabwean peers only. Given the operating environment there is implied volatility in the ratings. A positive or negative ratings movement could follow a change in capitalisation, asset quality or local currency liquidity.
Analytical Contacts
| Primary analyst | Vimbai Muhwati | Financial Institutions Analyst |
| Johannesburg, ZA | VimbaiM@GCRratings.com | +27 11 784 1771 |
| Committee chair | Matthew Pirnie | Group Head of Ratings |
| Johannesburg, ZA | MatthewP@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 Ratings Scales, Symbols & Definitions, May 2019 |
| GCR Country Risk Scores, May 2020 |
| GCR Financial Institutions Sector Risk Score, July 2020 |
| Jurisdictional Supplement for Criteria, July 2020 |
Ratings History
CBZ Bank Limited
Risk Score Summary
| Rating Components & Factors | Risk Scores |
| Operating environment | 1.00 |
| Country risk score | 0.00 |
| Sector risk score | 1.00 |
| Business profile | 2.00 |
| Competitive position | 2.00 |
| Management and governance | 0.00 |
| Financial profile | 1.00 |
| Capital and Leverage | 2.00 |
| Risk | (1.00) |
| Funding and Liquidity | 0.00 |
| Comparative profile | 0.00 |
| Group support | 0.00 |
| Government support | 0.00 |
| Peer analysis | 0.00 |
| Total Score | 4.00 |
Glossary
| Balance Sheet | Also known as Statement of Financial Position. A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been financed. |
| Capital | The sum of money that is invested to generate proceeds. |
| Cash | Funds that can be readily spent or used to meet current obligations. |
| 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 exposures 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. |
| 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. In insurance, it refers to an individual or company’s vulnerability to various risks |
| Income | Money received, especially on a regular basis, for work or through investments. |
| 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. |
| Issuer | The party indebted or the person making repayments for its borrowings. |
| Leverage | With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt. |
| 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. |
| Long Term Rating | See GCR Rating Scales, Symbols and Definitions. |
| Margin | A term whose meaning depends on the context. In the widest sense, it means the difference between two values. |
| Market | An assessment of the property value, with the value being compared to similar properties in the area. |
| Maturity | The length of time between the issue of a bond or other security and the date on which it becomes payable in full. |
| Rating Outlook | See GCR Rating Scales, Symbols and Definitions. |
| Risk | The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives. |
| Short Term Rating | See GCR Rating Scales, Symbols and Definitions. |
| Short Term | Current; ordinarily less than one year. |
SALIENT POINTS OF ACCORDED RATING
GCR affirms that a.) no part of the rating process 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.
The credit ratings have been disclosed to CBZ Bank Limited. The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings.
CBZ Bank Limited participated in the rating process via video conference management meetings, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The information received from CBZ Bank Limited and other reliable third parties to accord the credit ratings included:
- The audited financial results to 31 December 2019
- Four years of comparative audited numbers
- Unaudited management accounts as at 31 May 2020
- Breakdown of facilities
- Banking sector information and Industry comparative data
- Other related documents.
Due to severe foreign currency shortages, hyperinflation and significant monetary and exchange control policy changes over the last 12-18 months in our opinion, the national scale credit ratings on Zimbabwean entities are not directly comparable to credit ratings and risk scores within other markets. Furthermore, outlook statements may fail to capture forward looking trends due to the extreme volatility in the operating environment and audited opinions. See the latest Jurisdictional Supplement for Criteria, published July 2020.
