Johannesburg, 12 Jun 2015 — Global Credit Ratings has affirmed the national scale ratings assigned to FBC Building Society of BBB-(ZW) and A3(ZW) in the long term and short term respectively; with the outlook accorded as Stable. The rating(s) are valid until 06/2016.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating(s) to FBC Building Society (“FBCBS” and/or “the society”) based on the following key criteria:
The society’s ratings reflect its reputable track record in the mortgage lending space, stable and experienced management team, improved earnings performance in F14, as well as capital and liquidity metrics that are well above regulatory requirements. The ratings are, however, constrained by deterioration in the society’s asset quality (exacerbated by increasingly challenging operating conditions).
A risk-based onsite examination of FBCBS was carried out by the Reserve Bank of Zimbabwe (“RBZ”) in July 2014. The composite ‘CAMELS’ rating assigned to the society was ‘2 – satisfactory’, the same rating accorded in the previous review conducted in September 2007.
Driven by organic earnings growth, the society’s core capital increased by 31.5% to USD28m at FYE14, which is compliant with the regulatory minimum requirement of USD25m for building societies. The society’s capital base offers an adequate buffer against unexpected losses, as reflected by tier 1 and capital adequacy ratios of 38.1% and 40.4% respectively at FYE14, which are well above the statutory minima.
The society’s non-performing loans (“NPLs”) grew 2.2x in F14, compared to gross loan growth of 12.6%, mainly as a result of the RBZ downgrading some loans that were incorrectly classified by the society. As a result, the society’s gross NPL ratio increased to 10% at FYE14 (FYE13: 5.2%). To curb further asset quality deterioration, the society has lowered its risk appetite and tightened its risk acceptance criteria, while also establishing additional credit control/oversight functions.
The society posted a net surplus of USD6.8m (against a budget of USD7.9m) in F14 (F13: USD6.3m), impacted by higher funding costs and increased impairment charges. The society’s earnings are under threat from rising NPLs.
The society’s deposit base grew by 61.2% in F14. Its ability to attract deposits in a tight market is a relative strength, though wholesale funding dependence remains a concern. To mitigate the risks associated with the high concentration of its funding base, absence of an effective interbank market, and no lender of last resort in Zimbabwe, the society maintains a highly liquid balance sheet and adequate liquidity buffers. This is reflected by the society’s prudential liquidity ratio of 67.8% at FYE14, which is well above the regulatory minimum of 30%.
The society’s fragile operating environment increases the error margin on all forward looking scenarios. This, combined with the higher NPL level, makes an upgrade unlikely at this stage.
The society’s ratings will be sensitive to further deterioration in asset quality, and weaker long-term earnings generation, liquidity and/or capitalisation.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (Dec/2005)|
|Long term: BBB-(ZW)|
|Last rating (Jun/2014)|
|Long term: BBB-(ZW); Short term: A3(ZW)|
|Sector Head: Financial Institution Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2015
Zimbabwe Bank Statistical Bulletin (December 2014)
FBCBS rating reports (2005-14)
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 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 rating/s has been disclosed to FBC Building Society 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 Building Society 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
|Asset||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|Asset Quality||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 (i.e. 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.|
|Building Society||A type of deposit-taking financial institution that engages in long-term mortgage lending, primarily to finance owner-occupied residential mortgages/property.|
|CAMEL||The acronym for the mainstream approach to credit analysis of financial institutions, referring to the five core elements of any credit assessment: Capital Adequacy, Asset Quality, Management (Competency), Earnings (Profitability) and Liquidity (Funding).|
|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||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.|
|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.|
|Income Statement||A summary of all the expenditure and income of a company over a set period.|
|Insolvent||When an entity’s liabilities exceed its assets.|
|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.|
|Liabilities||All financial claims, debts or potential losses incurred by an individual or an organisation.|
|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||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.|
|Non-Performing Loan||When a borrower is overdue, typically 90+ days in arrears or as defined by the lender, or in the transaction documents.|
|NPL Ratio||The ratio of non-performing loans and advances to total gross loans and advances, expressed as a percentage.|
|Off Balance Sheet||Off balance sheet items are assets or liabilities that are not shown on a company’s balance sheet. They are usually referred to in the notes to a company’s accounts.|
|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.|
|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.|
|Unexpected Loss||Losses that may exceed the expected loss within a certain period (e.g. one year) and within a specified confidence level. Unexpected loss is the difference between value at risk and expected loss.|