Johannesburg, 31 August 2018 — 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 2019.
SUMMARY RATINGS RATIONALE
The ratings of Central Africa Building Society (“CABS”, “the Society”) reflect its improved earnings performance, adequate capitalisation, funding and liquidity and marginally improved asset quality. The ratings also factor in the Society’s established brand, access to financial and non-financial support from its parent (Old Mutual Zimbabwe Limited), its significant market share, as well as the Society’s strong competitive position. The ratings are constrained by the weak and uncertain operating environment.
The stable outlook reflects our opinion that the Society will retain its revenue stability, maintain sufficient liquidity and capital buffers, and improve its asset quality.
The Society retained its position as the most profitable financial institution in the industry in 2017. CABS reported USD42.1m net surplus in FY17, a 7.4% increase from the previous year’s profit USD39.2m. The profitability is sustained by diversified revenue sources and leverages on technology. The Society’s competitive position is augmented by growth in its balance sheet, a strong brand and extensive infrastructure. The cost to income ratio however deteriorated from 58.1% to 61.4% largely attributable to the variable costs of digital banking services. GCR expects the Society’s profitability and revenue stability to be maintained over the next 12 months.
The Society’s funding and liquidity profile was largely stable with notable improvement being the increase in customer deposits from 45.7% to 56.8% of total funding in FY17. As a result of this and other refinancing efforts the Society recorded a favourable shift in its cost of funding. However, customer deposits are largely constituted by corporate deposits at 73.5% at FY17 (FY16: 77.1%). GCR notes the potential volatility threat posed by wholesale deposits. CABS maintains a liquid balance sheet, with a liquidity ratio of 38.2% at FY17 (FY16: 37.5%), which was above the minimum regulatory ratio of 30%.
CABS is considered to adequately capitalised and have an aggressive dividend policy. The Society satisfied the tier 1 minimum capitalisation requirement of USD100m by 2020 as set by the regulator in 2016 and also being in compliance with all regulatory minima. Given the strength of the parent, significance within the group and the Society’s nominal internal capital generation ability of USD42.1m (FY16: USD39.2m), GCR is of the view that CABS will continue to maintain appropriate capital buffers into the foreseeable future.
The Society’s risk position is considered adequate. Despite growing its gross loan book by 13.6% in FY17, the Society’s improved lending approach resulted in a decrease in gross NPLs ratio from 8.3% to 6.3% in FY17, which was better than the industry average of 7.1% for the same period. CABS sufficiently provides for loss given default with provision coverage of gross NPLs for FY17 of 77% (FY16: 72%). GCR expects the improvement in asset quality to continue over the short term.
CABS’ ratings could be positively impacted by a sustained improvement in capitalisation and liquidity metrics, further strengthening of the Society’s competitive positioning. Downward pressure on CABS’ ratings could stem from deterioration in asset quality, liquidity, capitalisation and/or worsening operating environment.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (October 2000)||Last rating (August 2017)|
|Long-term: A+(ZW); Short-term: A1+(ZW)||Long-term: A+(ZW); Short-term: A1(ZW)|
|Outlook: Stable||Outlook: Stable|
|Primary Analyst||Secondary Analyst|
|Simbarake Chimutanda||Kudzanai Samanga|
|Credit Analyst||Junior Credit Analyst|
|(011) 784-1771||(011) 784-1771|
|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 (2000-17)
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 2017 (and four years comparative numbers)
• Unaudited interim results at 30 June 2018
• Budgeted financial statements for 2018
• 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.