Johannesburg, 29 June 2018 — 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 2019.
SUMMARY RATINGS RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to FBC Building Society (“FBCBS”, “the society”) based on the following key criteria:
The ratings accorded to FBC Building Society reflect its reputable track record in the mortgage lending space, benefits from being part of the wider FBC group, sound capitalisation supported by good earnings and liquidity metrics as well as relatively sound asset quality. 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. Offsetting these is funding concentration risk although retail deposits have diluted concentration.
The outlook for the society is Positive reflecting our opinion that financial performance will be sustainable, further strengthening the capital position, or there will be an improvement in asset quality, funding concentrations or competitive positioning, while the group’s performance will continue consolidating support for the society.
Capitalisation remains strong, supported by organic growth. The Tier 1 comfortably exceeds the regulatory minimum requirement of USD20m for building societies. Capital adequacy improved in FY17, as reflected by Tier 1 and total capital adequacy ratio of 54.9% (FY16: 45.0%) and 57.4% (FY16: 47.1%), respectively and it offers a solid buffer against unexpected losses. Earnings registered a 9.3% growth to USD9.3m at FY17, attributable to improving revenue margins. The society’s cost ratio however marginally increased to 42.5% (FY16: 41.2%) due to a 13.9% increase in operating expenditure from investments in new digital banking and e-channels. ROaA increased to 7.2% from 5.8% in FY16 due to a 12% decrease in assets. Nevertheless, there was a 9.3% increase in surplus and 10.5% increase in net income despite the decrease in total assets. ROaE decreased to 19.6% (FY16: 20.6%), which compared favourably to its peers.
The society as part of the FBC group benefits from being part of a diversified group, which has displayed resilient performance and stability, while also improving the brand competitiveness and synergies within the group.
Asset quality metrics weakened in FY17 as non-performing loans (“NPLs”) represented 6.6% (FY16: 5.9%; FY15: 8.5%) of gross loans and were 39.7% (FY16: 52.8%; FY15: 23.5%) covered by specific impairment provision. However, FBCBS’ portfolio at risk (NPLs and past due loans) decreased to 17.1% (FY16: 22.9%) at FY17. FBCBS specialises in mortgage lending, hence credit losses are partially hedged by collateral held. In that regard, the society has strong recoveries through its ability to repossess from defaulting mortgages customers.
The society has a high funding risk as it relies on corporate deposits (80.5% of customer deposits) and the top 20 depositors contributed 83% of total deposits. Very high deposit concentration levels expose the society to unexpected and large outflows thus prompting liquidity pressures. The society has sound liquidity metrics with cash and cash equivalents, equivalents and financial assets investment combined making the largest asset class on the balance sheet representing 44.3% of total assets at FY17.
A positive rating action could result from sustained financial performance and capitalisation or an improvement in asset quality, funding concentrations or competitive positioning. 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 2017) | |
| Long-term: BBB-(ZW) | Long term: BBB-(ZW); Short term: A3(ZW) | |
| Outlook: Stable | Outlook: Positive | |
| Initial rating( June 2013) | ||
| Short term: A3(ZW) |
ANALYTICAL CONTACTS
| Primary Analyst | Secondary Analyst | |
| Vimbai Muhwati | Victor Matsilele | |
| Credit Analyst: Financial institution Ratings | Junior Credit Analyst: Financial Institution Ratings | |
| (011) 784-1771 | (011) 784-1771 | |
| vimbaim@globalratings.net | victorm@globalratings.net | |
| Committee Chairperson | ||
| Matthew Pirnie | ||
| Sector Head: Financial Institutions | ||
| (011) 784-1771 | ||
| matthewp@globalratings.net |
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions (March 2017)
FBC Building Society rating reports (2005-17)
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 ratings was influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such ratings were 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 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 2017 (and four years of comparative numbers);
- Unaudited management accounts as at 31 March 2018;
- Budgeted financial statements for the year 2018;
- Latest internal and/or external audit report to management;
- 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. |
| 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. |
| 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 detailed glossary of terms please click here
