Johannesburg, 30 June 2017 — Global Credit Ratings (“GCR”) has affirmed FBC Building Society’s long-term and short-term national scale ratings of BBB-(ZW) and A3(ZW) respectively; with the outlook accorded as Positive. The ratings are valid until June 2018.
SUMMARY RATINGS RATIONALE
The ratings of FBC Building Society (“FBCBS”, “the society”) reflect its reputable track record in the mortgage lending space, stable and experienced management team, improving asset quality metrics, and sound capital and liquidity metrics that are well above regulatory requirements. The ratings also reflect the society’s ability to generate attractive returns from a relatively smaller asset base, thus outperforming most of its peers in key profitability metrics. The ratings balance these strengths against the society’s low levels of retail deposits and funding concentration risk.
Driven by organic growth, the society’s core capital increased by 17.5% to USD41.1m at FY16, complying with the regulatory minimum requirement of USD20m for building societies. The society’s capital base offers a solid buffer against unexpected losses, as reflected by its capital adequacy ratio (“CAR”) of 47.1% at FY16, which was well above the statutory minimum of 12%. However, IFRS 9 adoption (the impact of which is still being evaluated by FBCBS) is expected to reduce the society’s capitalisation in 2018 (although the quantum is not expected to be significant, taking cognisance of the secured nature of mortgage lending).
Asset quality metrics continued to improve in FY16 evidenced by the society’s non-performing loan (“NPL”) ratio which decreased to 5.9% at FY16 (FY15: 8.5%, FY14: 10%). Furthermore, specific provision coverage of NPLs increased to 53.4% (FY15: 23.8%) at FY16. Consequently, NPLs amounted to a lower 4.1% (FY15: 11.1%) of regulatory capital at FY16. In general, GCR does not consider collateral in the assessment of key asset quality indicators, but acknowledges the society’s ability to repossess properties in the event of defaults on mortgage loans by clients, as evidenced by strong recoveries.
The society has sound liquidity metrics which continued to strengthen at FY16. Cash and cash equivalents, the largest asset class on the balance sheet, represented 42.1% of total assets at FY16, mitigating market wide liquidity risk associated with short-term negative asset/liability mismatches. The liquid assets/short-term deposits ratio was high at 64.2% at FY16. In addition, the society’s prudential liquidity ratio was maintained above the regulatory minimum of 30% throughout FY16.
The society relies on a wholesale funding model (primarily money market deposits). The funding base grew by 13.6% in FY16 albeit a low savings culture in the country and low disposable incomes continue to weigh on growth in retail deposits. However, the society’s pricing of retail deposits has not been favourable enough to enable it to attract a significant deposit market share.
The society’s net surplus registered 35% growth to USD8.5m at FY16, attributable to improving revenue margins and cost/income ratio. ROaE increased to 20.6% (FY15: 18%) at FY16. The society leveraged its large cash and cash equivalents balances, and income growth, through acquisition of high yield treasury bills, which in turn improved the net interest margin. The society continues to deliver attractive returns, outperforming most banks on key profitability metrics such as ROE.
Maintenance of strong profitability, asset quality, and financial profile metrics could result in a positive rating action. A decrease in funding concentration risk, and market share enhancement, would also be positively considered. Negative rating action would likely follow a reversal in trends in asset quality, capitalisation, profitability, and/or liquidity metrics currently observed.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (December 2005)||Last rating (June 2016)|
|Long-term: BBB-(ZW)||Long term: BBB-(ZW); Short term: A3(ZW)|
|Outlook: Stable||Outlook: Stable|
|Primary Analyst||Secondary Analyst|
|Kurt Boere||Simbarake Chimutanda|
|Credit Analyst||Credit Analyst|
|(011) 784-1771||(011) 784-1771|
|Sector Head: Financial Institutions|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions (March 2017)
FBC Building Society rating reports (2005-16)
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.
FBC 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 FBC Building Society with no contestation of the ratings.
Information received from FBC Building Society and other reliable third parties to accord the credit ratings included:
- Audited financial results as at 31 December 2016 (and four years of comparative numbers);
- Unaudited management accounts as at 31 March 2017;
- Budgeted financial statements for the year 2017;
- Latest internal and/or external audit report to management;
- A breakdown of facilities available and related counterparties;
- Corporate governance and enterprise risk framework; and
- Industry comparative data.
The ratings above were solicited by, or on behalf of FBC 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.|
|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.|
|Capital Base||The issued capital of a company, plus reserves and retained profits.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Cash Equivalent||An asset that is easily and quickly convertible to cash such that holding it is equivalent to holding cash.|
|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.|
|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.|
|Hedge||A risk management technique used to reduce the possibility of loss resulting from adverse movements in commodity prices, equity prices, interest rates or exchange rates arising from normal banking operations. Most often, the hedge involves the use of a financial instrument or derivative such as a forward, future, option or swap. Hedging may prove to be ineffective in reducing the possibility of loss as a result of, inter alia, breakdowns in observed correlations between instruments, or markets or currencies and other market rates.|
|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.|
|Leverage||With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.|
|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.|
|Margin||The rate taken by the lender over the cost of funds, which effectively represents the entity’s profit and remuneration for taking the risk of the loan; also known as spread.|
|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.|
|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.|
|Term Deposit||A savings account held for a fixed term. Also called a time deposit. Generally, there are penalties for early withdrawal.|
|Treasury Bill||Short-term obligation backed by the government that bears no interest and is sold at a discount.|
|Yield||Percentage return on an investment or security, usually calculated at an annual rate.|
For a glossary of terms please click here
GCR affirms FBC Building Society’s rating of BBB-(ZW); Outlook Positive.