Johannesburg, 07 July 2021 – GCR Ratings (“GCR”) has affirmed Central Africa Building Society’s national scale long term issuer and short term issuer ratings of A+(ZW) and A1(ZW) respectively, with a Stable Outlook.
|Rated Entity||Rating class||Rating scale||Rating||Outlook|
|Central Africa Building Society||Long Term issuer||National||A+(ZW)||Stable Outlook|
|Short Term issuer||National||A1(ZW)|
The national scale issuer ratings on Central Africa Building Society (“CABS”, “the Society”) factor in the Society’s solid franchise as the largest and oldest building Society in Zimbabwe, support structure through its parent, Old Mutual Zimbabwe Limited (financial and non-financial) and sound market share relative to top tier domestic commercial banks. The ratings also reflect healthy capitalisation, relatively stable funding structure and adequate, albeit constrained market wide liquidity. The outlook is restrained by the hyperinflationary environment and adverse unquantified ramifications of the on-going COVID-19 pandemic in the context of the regulatory environment.
The business profile is ratings positive. The society has a strong brand as the largest and oldest building society in Zimbabwe. The market share of advances and deposits is above industry averages though slightly below top tier peers. While geographic diversification is limited to Zimbabwe, CABS benefits from one of the largest distribution networks (just over 28k Point of sale machines (“POS”) and 40 branches in June 2021) resulting in large transactional volumes. Resultantly, inflation adjusted fee income contributed 44% to operating revenues at 31 March 2021. Revenue stability and creation is broadly in-line with banking sector peers, the society experienced a notable shift from net interest income to non-interest income between the period 2019 to 2021. GCR also takes into account the risk of value erosion of the net monetary balance sheet and capital as a result of hyperinflation and exchange rate devaluation.
Capitalisation is adequate supported by a GCR capital ratio of 26% at 31 December 2020. In March 2021, regulatory core capital was above the USD30m 31 December 2021 requirement. The biggest risk to the target is a rapid deterioration in the exchange rate. As at June 2021, CABS was designated as a domestic systemically important bank (“D-SIB”). We expect pressure on profitability to persist balancing the impact of hyperinflation on the net monetary asset balance sheet offset by foreign currency income generation strategies. Given the adverse operating conditions, reserve coverage was adequate.
The risk profile is slightly ratings negative. CABS had high single name concentrations in comparison to top rated peers. Consequently, there is credit risk due to impact of harsh operating conditions and COVID-19 on affected borrowers. The gross non-performing loan ratio of 0.4% at 31 March 2021 was slightly higher than the top peer range of 0.1% to 0.2%. Unfortunately, as a function of the economy, the mortgage book portfolio is under pressure due to the absence of property trades in local currency and accelerated mortgage repayments. Resultantly, the mortgage lending business has been subdued. Foreign exchange rate risk is moderate in the local market context given the stability on the exchange rate since Q42020.
The funding structure is broadly in line with top peers, albeit with more debt exposure. At 31 March 2021, customer deposits comprised c.81% of the liability funding base. At 31 May 2021, 92% of customer deposits were on demand, with the bulk from commercial. This exposed the Society to short-term maturity mismatches in its asset/liability profile (industry wide) leaving CABS susceptible to external shocks, further exacerbated by the challenging operating environment. However, CABS has appropriate liquidity mitigating structural funding risks. As a result of a low liquidity cap relative to the size of the institution, local currency liquidity is tight. FX liquid asset coverage of the FX funding base was good at 58% demonstrating appropriate foreign currency liquidity.
The ratings benefit from support and integration of the Society with its ultimate parent, Old Mutual Zimbabwe Limited, although not a material asset or revenue contributor.
The outlook is stable, balancing our expectation that CABS will maintain a sound financial profile supported by sound internal capital generation, relatively low asset quality risk and adequate levels of liquidity against the turbulent operating environment.
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 liquidity.
|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, June 2021|
|GCR Financial Institutions Sector Risk Score, June 2021|
|Jurisdictional Supplement for Criteria, July 2020|
Central Africa Building Society
Risk Score Summary
|Rating Components & Factors||Risk Scores|
|Country risk score||0.00|
|Sector risk score||1.00|
|Management and governance||0.00|
|Capital and Leverage||2.00|
|Funding and Liquidity||0.00|
|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 Central Africa Building Society. 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.
Central Africa Building Society 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 Central Africa Building Society and other reliable third parties to accord the credit ratings included:
- The audited financial results to 31 December 2020
- Unaudited management accounts as at 31 March 2021
- 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.