Johannesburg, 26 August 2016 – Global Credit Ratings has affirmed the national scale ratings assigned to Central Africa Building Society 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 August 2017.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Central Africa Building Society’s (“CABS”, “the Society”) based on the following key criteria:
The accorded ratings reflect CABS’s long history and established brand, significant local market share, risk appropriate capitalisation and proven support structure (financial and technical) provided by Old Mutual Zimbabwe Limited and its ultimate parent, Old Mutual Plc. Notwithstanding this, the Society remains under significant pressure from ongoing domestic macroeconomic challenges (including weak economic activity and a cash crisis), that have put pressure on liquidity, asset quality and earnings stability in all banks including CABS.
CABS reported a total risk weighted capital adequacy ratio (“CAR”) of 18.2% (FYE14: 21.7%) and Tier 1 CAR of 14.2% (FYE14: 12.4%) at FYE15, which were above the regulatory minima of 12% and 8% respectively.
Asset quality remains under pressure due to consumer affordability constraints and negative trends in the operating environment (including company closures, business restructuring, retrenchments, delayed salary payments, salary cuts and resignations). In response, management has tightened lending criteria, implemented a more conservative provisioning policy, stepped up collection recovery efforts (including loan restructuring) and curtailed lending in F16. Gross non-performing loans (“NPLs”) grew by 25.0% to USD43.8m at FYE15 (FYE14: 9.7% decrease). Notwithstanding this, gross NPLs amounted to a slightly reduced 7.5% of gross loans at FYE15 (FYE14: 7.7%), with the ratio partly masked by the 29.5% loan growth. The banking industry average gross NPL ratio was 10.9% at end-2015 (2014: 15.9%). Nevertheless, CABS’ special mention loans/early (<90 days) arrears grew by 74.1% in F15, and were equivalent to 17.9% of gross loans (F14 13.3%). Specific provisions covered 48.7% of NPLs at FYE15, up from 12.1% at FYE14, pre-collateral. Accordingly, unreserved NPLs (by specific provisions) amounted to a lower 15.5% of total regulatory capital at FYE15 (FYE14: 23.9%). Total provisions (general and specific) covered NPLs by 76.6% at FYE15 (FYE14: 31.1%).
The Society’s net surplus for the year grew by 18.0% to USD28.4m in F15 (F14: 31.4%). Notwithstanding a doubling of loan impairment charges, earnings growth in F15 was supported mainly by an expanded loan book and focus on operating expense management. Overall, the ROaE for F15 amounted to a higher 19.6% (F14: 19.0%), while the ROaA was a slightly lower 3.0% (F14: 3.3%).
The structural makeup of the Society’s funding base remains an issue due to the high wholesale component and an extremely short maturity structure. Direct funding and liquidity risks are partly ameliorated by the significant coverage of short-term funding by liquid assets (46.2% at FYE15) and access to group funding. Furthermore, in light of the high regulatory liquidity requirement, CABS maintains a liquid balance sheet. The Society’s average liquidity ratio was 36.0% in F15, which was above the statutory minimum of 30%.
Strong asset quality indicators, a positive earnings trend, strong capital cushion and liquidity buffers, and maintaining market position and shareholder support, could lead to upward ratings migration. Furthermore, upside potential would probably require notable improvements in the operating environment. GCR also takes note of the need to further reduce the cost of funding. A weakened shareholder support floor will negatively affect the ratings. Other key rating triggers for a downgrade include a sustained weakening in profitability stemming from a sharp rise in loan loss provisions and a higher susceptibility to regulatory and economic changes, or from a marked decline in liquidity or capitalisation.
NATIONAL SCALE RATINGS HISTORY
|Initial rating (October 2000)|
|Long-term: A+(ZW); Short-term: A1+(ZW)|
|Last rating (September 2015)|
|Long-term: A+(ZW); Short-term: A1(ZW)|
|Primary Analyst||Committee Chairperson|
|Jennifer Mwerenga||Omega Collocott|
|Senior 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 2016
Zimbabwe Bank Statistical Bulletin (June2016) CABS 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.
Central Africa Building Society 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 Central Africa Building Society with no contestation of the rating.
The information received from Central Africa Building Society and other reliable third parties to accord the credit ratings included:
- Audited financial results as at 31 December 2015 (and four years of comparative numbers)
- Unaudited management accounts as at 30 June 2016
- Budgeted financial statements for 2016
- 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 rating above was solicited by, or on behalf of, Central Africa Building Society, 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 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).|
|Balance Sheet||Also known as a 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.|
|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|Building Society||A type of deposit-taking financial institution that engages in long-term mortgage lending, primarily to finance owner-occupied residential mortgages/property.|
|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.|
|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.|
|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.|
|Liquid Assets||Assets, generally of a short term, that can be converted into cash.|
|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.|
|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||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.|
|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.|
|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 utilised in this announcement please click here
GCR affirms Central Africa Building Society’s rating of A+(ZW); Outlook Stable.