Johannesburg, 12 November 2015 — Global Credit Ratings has affirmed the national scale long term 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 2016.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to CBZ Bank Limited (“CBZ” and/or “the bank”) based on the following key criteria:
In April 2015, CBZ’s long-term national scale rating was downgraded by one notch to A(ZW), on account of sustained deterioration in asset quality indicators, coupled with declining profitability. Subsequently, the bank’s ratings were placed on ‘Rating Watch’ to reflect the short-term outcomes of the proposed sale of non-performing loans (“NPLs”) to the Zimbabwe Asset Management Company (“ZAMCO”), a special purpose vehicle formed to buy banks’ secured NPLs in exchange for long term treasury bonds, and the outcome of collection efforts of ‘special mention’ loans (which are classified as past due but not impaired loans).
An interim review has revealed an improvement in the bank’s asset quality indicators, following the successful sale of overdue loans in the amount of USD84.9m to ZAMCO and enhanced collections. In this regard, while some previous performing loans migrated into the special mention category, the sum of the bank’s special mention and NPLs declined by 12.4% to USD394.4m between FYE14 and 3Q F15. NPLs equated to a lower 7.6% of gross loans (FYE14: 8.2%) and special mention loans accounted for a reduced 31.1% (FYE14: 35.8%) of total loans at 3Q F15. Management indicated that a further USD8.6m worth of overdue loans have met the ZAMCO eligibility criteria and are due for transfer to that entity, and that the bank is aggressively seeking to dispose of additional delinquent loans. Furthermore, in an attempt to prevent further asset quality deterioration, the bank has tightened its lending criteria and placed greater emphasis on collections. While it is positively noted that the bank has been gradually increasing its specific provisioning coverage (3Q F15: 47.4%; FYE14: 42.9%; FYE13: 37.3%), its net NPL to capital ratio of 29.9% at 3Q F15 (FYE14: 38.2%; FYE13: 25.4%) remains a key concern. Nonetheless, in GCR’s view, the bank’s capital base provides a moderate buffer for the existing level of NPLs at present, but possible migration of special mention loans into the NPL category (given the persisting operating environment challenges) presents an ongoing risk.
Earnings generation remains healthy considering the weakened operating environment. Profitability, measured in terms of ROaE and ROaA, has been declining for at least the past two years largely due to higher impairment charges and shrinking net interest margins against the background of lower yields on loans and higher funding costs (a trend expected to continue in the short to medium term due to the regulatory capping of lending rates). At 1H F15, CBZ registered a ROaE and ROaA of 13.1% and 1% respectively (FYE14: 13.6% and 1.1%; FYE13: 16.8% and 1.4%). Over the medium-term, incremental provisions remain the key risk to CBZ’s profitability, as continued downgrades into lower categories (that require higher provisioning) cannot be fully discounted. Given the constrained credit environment, management indicated that the bank seeks to focus on generating non-funded income streams.
CBZ continues to display a strong funding profile and a comfortable liquidity position. Despite registering cumulative liquidity gaps in all maturity buckets at 1H F15 (as is typical of the domestic banking system), the bank maintained a reasonable discretional buffer of highly tradable marketable securities and other liquid assets. The bank’s liquidity ratio has been trending above 40%, and thus well above the regulatory minimum of 30%.
The ‘Stable’ outlook reflects the bank’s stable financial profile relative to the prior review period. GCR sees limited scope for upward movement of the bank’s ratings, in light of the difficult operating environment. However, sustained improvements in the bank’s credit profile, earnings power and capitalisation, resulting in enhanced resilience to a volatile operating environment, could positively impact the bank’s ratings. A continued weakening of the bank’s asset quality metrics, lower earnings and capital strain, or a subsequent deterioration in the bank’s solvency indicators, would exert downward pressure on the bank’s ratings.
NATIONAL SCALE RATINGS HISTORY
Initial rating (September 2000)
Long term: A-(ZW); Short term: A2(ZW)
Last rating (April 2015)
Long term: A(ZW); Short term: A1(ZW)
Rating Watch: Yes
Primary Analyst Committee Chairperson
Kuzivakwashe Murigo Omega Collocott
Credit 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 2015
Zimbabwe Bank Statistical Bulletin (June 2015)
CBZ rating reports (2000-15)
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.
CBZ Bank Limited participated in the rating process via written correspondence and teleconference. 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 2014 (and three years of comparative numbers)
- Unaudited interim results at 30 June 2015 and 30 September 2015
- Budgeted financial statements for 2015
- Latest internal and/or external audit 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 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
|Asset||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|Asset Quality||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 (i.e. being paid back in accordance with their terms) and the likelihood that they will continue to perform.|
|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.|
|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.|
|Credit Rating Agency||An entity that provides credit rating services.|
|Credit Risk||The possibility that a bond issuer or any other borrowers (including debtors/creditors) will default and fail to pay the principal and/or interest when due.|
|Downgrade||The assignment of a lower credit rating to a company or sovereign borrower’s debt by a credit rating agency. Opposite of upgrade.|
|Financial Institution||An entity that focuses on dealing with financial transactions, such as investments, loans and deposits.|
|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||Not current; ordinarily more than one year.|
|Maturity||The length of time between the issue of a bond or other security and the date on which it becomes payable in full.|
|National Scale Rating||The national scale 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 Interest Margin||Net interest margin is the net interest income divided by average interest earning assets.|
|Non-Performing Loan||When a borrower is overdue, typically 90+ days in arrears or as defined by the lender, or in the transaction documents.|
|Past Due||Any note or other time instrument of indebtedness that has not been paid on the due date.|
|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.|
|Principal||The total amount borrowed or lent, e.g. the face value of a bond, excluding interest.|
|Provision||The amount set aside or deducted from operating income to cover expected or identified loan losses.|
|Rating Watch||Indicates that a rating is under review for possible change in the short term and the movement may be either positive or negative.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|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.|
|Solvent||The state of a company where its assets exceed its liabilities and it is able to service its debt and meet its other obligations, especially in the long-term.|
GCR affirms CBZ Bank Limited’s rating of A(ZW); Outlook Stable