Johannesburg, 4 Jun 2015 — Global Credit Ratings has affirmed the national scale ratings assigned to FBC Bank Limited of A-(ZW) and A2(ZW) in the long term and short term respectively; with the outlook accorded as Negative. The rating(s) are valid until 06/2016.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating(s) to FBC Bank Limited (“FBC Bank” and/or “the bank”) based on the following key criteria:
FBC Bank’s ratings are constrained by deterioration in asset quality metrics, as well as weak earnings performance following a once-off loss on divesture from Turnall Holdings Limited (“Turnall”) and significantly increased impairment charges. The deterioration in loan book quality followed the bank’s restructure of various short term facilities after securing a USD60m facility underwritten by the African Export-Import Bank, and the mandatory classification of these facilities within impaired loans for a prescribed six month period. The ‘Negative’ rating outlook reflects the potential risks posed by weakened asset quality and operating margins, given the increasingly challenging operating conditions in Zimbabwe.
After receiving a directive from the Reserve Bank of Zimbabwe (“RBZ”) instructing the bank to dispose of its entire Turnall shareholding, a loss on disposal of USD5.9m was realised by the bank on settlement of the dividend in specie to FBC Holdings Limited (“FBCH” and/or “the group”) in F14.
A risk-based onsite examination of FBC Bank was carried out by the RBZ in July 2014. The composite ‘CAMELS’ rating assigned to the bank was ‘2 – satisfactory’, the same rating accorded in the previous review conducted in September 2007.
While in previous years the bank was in a capital accumulation cycle, in F14 substantial increases in provisioning levels, coupled with the loss on disposal and the declaration of the dividend in specie (to facilitate the divesture from Turnall) reduced the bank’s ability to retain earnings. Consequently, the bank’s core capital declined to USD26.5m at 1Q F15, still meeting the statutory requirement of USD25m. All other regulated metrics remained above the stipulated minima.
Credit risk is a concern given the significant increase in the bank’s special mention and non-performing loans (“NPLs”). The bank’s gross NPL ratio deteriorated to 16.6% at FYE14 (FYE13: 8.9%).
The bank reported an after-tax loss of USD0.3m in F14, mainly as a result of the once-off loss on disposal of Turnall, heightened impairment charges and high cost of funding.
To mitigate the risks associated with the high concentration and composition of its funding base (which is skewed towards relatively expensive wholesale deposits), absence of an effective interbank market, and no lender of last resort in Zimbabwe, the bank maintains a liquid balance sheet and sufficient liquidity buffers. This is reflected by the bank’s prudential liquidity ratio of 36.1% at FYE14, above the regulatory minimum of 30%.
Given the ‘Negative’ rating outlook and the challenging operating environment, there is currently limited upside rating potential. The bank’s ratings will be sensitive to further deterioration in asset quality, long-term earnings (leading to a weakened buffer to counter business risks) and the bank’s inability to meet the regulatory capital and/or liquidity requirements.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (Jun/2006)|
|Long term: BBB+(ZW)|
|Last rating (Jun/2014)|
|Long term: A-(ZW); Short term: A2(ZW)|
|Sector Head: Financial Institution Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Banks and Other Financial Institutions, updated March 2015
Zimbabwe Bank Statistical Bulletin (December 2014)
FBC Bank rating reports (2006-14)
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.
FBC Bank Limited 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 rating/s has been disclosed to FBC Bank Limited with no contestation of the rating.
The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.
The information received from FBC Bank Limited and other reliable third parties to accord the credit rating/s included the 31 December 2014 audited annual financial statements (plus four years of comparative numbers), latest internal and/or external report to management, 2014 and 2015 budgeted financial statements, 31 March 2015 management accounts, corporate governance and enterprise risk framework, reserving methodologies, capital management policy, industry comparative data and regulatory framework, and a breakdown of facilities available and related counterparties.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S FINANCIAL INSTITUTIONS GLOSSARY
|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.|
|Corporate Governance||Corporate governance broadly 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||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.|
|Creditworthiness||An assessment of a debtor’s ability to meet debt 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.|
|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.|
|Income Statement||A summary of all the expenditure and income of a company over a set period.|
|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.|
|Interest Rate||The charge or the return on an asset or debt expressed as a percentage of the price or size of the asset or debt. It is usually expressed on an annual basis.|
|Lease||Conveyance of land, buildings, equipment or other assets from one person (lessor) to another (lessee) for a specific period of time for monetary or other consideration, usually in the form of rent.|
|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.|
|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.|
|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.|
|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.|