Johannesburg, 31 August 2017 — Global Credit Ratings (“GCR”) has affirmed Central Africa Building Society’s long-term and short-term national scale ratings of A+(ZW) and A1(ZW) respectively; with the outlook accorded as Stable. The ratings are valid until August 2018.
SUMMARY RATINGS RATIONALE
The ratings of Central Africa Building Society (“CABS”, “the Society”) reflect its improved capitalisation and earnings metrics, and relatively weaker asset quality. The ratings also factor in the Society’s strong brand, support structure through its parent, Old Mutual Zimbabwe Limited (financial and non-financial) and its significant market share, as well as the Society’s strong competitive position. The ratings also reflect the weak and uncertain operating environment with physical cash shortages resulting in a shift in the market to plastic money (leading to the Society investing in more Point of Sale (“POS”) machines and upgrading IT systems).
There was an improvement in profitability in FY16, with the Society’s net surplus growing by 38.3% (FY15: 18.0%) to USD39.2m as a result of a significant 83.9% decline in the impairment charge from FY15 and a 16.8% reduction in interest expense. Interest income decreased by 7.4% as a result of interest rate caps but fees and commission income rose 7.8% due to increased transaction volumes. Overall, the ROaE for FY16 amounted to a higher 23.8% (FY15: 19.6%), while the ROaA was a slightly higher 3.7% (FY15: 3.0%).
CABS reported a total risk weighted capital adequacy ratio (“CAR”) of 18.3% (FY15: 18.2%) and Tier 1 CAR of 12.5% (FY15: 12.4%) at FY16, which were above the regulatory minima of 12% and 8% respectively.
The Society’s funding and liquidity risks were reduced by significant coverage of short-term funding by liquid assets (45.2% at FY16) and access to group funding. CABS maintains a liquid balance sheet, with a statutory liquidity ratio of 37.5% at FY16, being above the minimum of 30%. The Society’s funding mix has improved with an increase in demand deposits. Cost of funding will decrease as high interest rate funding deposits mature and are replaced by low interest deposits.
Asset quality weakened due to the weak economic environment which has increased credit risk characterised by high defaults. The Society has responded by slowing lending, with only a 3.0% growth in gross advances in FY16 as compared to 29.5% in FY15, while it stepped up collection recovery efforts (including loan restructuring). Gross non-performing loans (“NPLs”) grew by 14.1% to USD49.9m at FY16 (FY15: 25.0% decrease). Gross NPLs also increased to 8.3% of gross loans at FY16 (FY15: 7.5%), while slightly above the banking industry average gross NPL ratio of 7.9% at end-2016 (2015: 10.9%).
An uncertain economic environment is expected to curtail growth in the loan book coupled with competition on the transaction based retail business. The Society will however continue its strategy to grow the retail transaction business and also cautiously grow the mortgage book. In terms of corporate lending, the Society will focus on attracting borrowers who are also exporters to help mitigate liquidity risk emanating from foreign currency shortages.
CABS’ ratings could be positively impacted by an improvement in the operating environment, asset quality, sustained profitability, strong capital cushion, maintaining shareholder support, reduction of cost of funding and maintaining market position. Downward pressure on CABS’ ratings could stem from a decline in market share, weakened shareholder support, weakening profitability, and further deterioration in asset quality.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (October 2000)||Last rating (August 2016)|
|Long-term: A+(ZW); Short-term: A1+(ZW)||Long-term: A+(ZW); Short-term: A1(ZW)|
|Outlook: Stable||Outlook: Stable|
Junior Credit Analyst
|Sector Head: Financial Institution Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions (March 2017)
Central Africa Building Society rating reports (2000-16)
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 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 ratings.
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 2016 (and four years comparative numbers)
• Unaudited interim results at 30 June 2017
• Budgeted financial statements for 2017
• Latest internal and/or external audit report to management
• A breakdown of facilities available and related counterparties
• Corporate governance and enterprise risk framework
The ratings above were 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
|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.|
|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.|
|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.|
|Capital Base||The issued capital of a company, plus reserves and retained profits.|
|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.|
|Default||Failure to meet the payment obligation of either interest or principal on a debt or bond. Technically, a borrower does not default, the initiative comes from the lender who declares that the borrower is in default.|
|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.|
|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.|
|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.|
|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.|
|Retained Earnings||Earnings not paid out as dividends by a company. Retained earnings are typically reinvested back into the business and are an important component of shareholders’ equity.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|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.|
|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.|
|Stock Exchange||A market with a trading-floor or a screen-based system where members buy and sell securities.|
For a full glossary of terms please click here
GCR affirms Central Africa Building Society’s rating of A+(ZW); Outlook Stable.