Rating Action
Johannesburg, 14 August 2020 – GCR Ratings (“GCR”) has affirmed First Capital Bank Zimbabwe Limited’s national scale long term and short term issuer ratings of A+(ZW) and A1(ZW) respectively, with an Evolving Outlook.
| Rated Entity | Rating class | Rating scale | Rating | Outlook/Watch |
| First Capital Bank Zimbabwe Limited | Long Term issuer | National | A+(ZW) | Evolving Outlook |
| Short Term issuer | National | A1(ZW) |
Rating Rationale
The national scale issuer ratings on First Capital Bank Zimbabwe Limited (“FCB Zimbabwe”, “the bank”) take into account the bank’s modest competitive position supported by above average business diversification, franchise strength and low cost of funds. Furthermore, the ratings also reflect adequate albeit constrained capitalisation, a relatively stable funding structure and appropriate liquidity, offset by a weaker risk position in comparison to domestic top tier banks. The outlook is reflective of the adverse operating conditions exacerbated by a hyperinflationary environment and unstable monetary policy resulting in a more volatile financial profile. The outlook also reflects the adverse unquantified ramifications of the on-going COVID-19 pandemic on the environment.
The business profile is a ratings positive. The bank has a sound competitive position in comparison to rated peers reflected by 1) a relatively stable customer base supporting its solid domestic footprint and 2) low cost of funds of below 0.5% in line with top tier industry peers. Franchise strength is sound reflected partly by good customer retention during the transition from Barclays Bank to FCB Zimbabwe. Revenue stability and creation is broadly in-line with banking sector peers. In the above consideration, GCR takes into account the high risk of value erosion of the monetary assets as a result of hyperinflation. The Management and Governance factor is neutral to the ratings.
Capitalisation is adequate supported by a high GCR leverage ratio, offset by relatively weaker earnings quality characterised by increasing amounts of market sensitive income. The bank’s GCR leverage ratio was 13.4% at 31 December 2019 and is expected to range between 11% and 13% in the next 12 months given the current dynamics. Earnings quality has a moderately negative ratings which is reflected by revenue stability risk characterised by increasing reliance on market sensitive income which is susceptible to the volatile monetary policy. We expect additional pressure on profitability taking into account constrained internal capital generation balancing the impact of hyperinflation on the net monetary asset balance sheet offset by growth in foreign currency (“FX”) income. Given the adverse operating conditions, reserving of stage 3 loans was deemed adequate.
The Risk profile is a moderate ratings negative. The low gross non-performing loan ratio of below 0.5% at 30 June 2020 was offset by relatively higher cost of risk in comparison to top tier banks and high single name concentrations in comparison to rated peers with the top 20 exposures contributing 72% to total exposures. Furthermore, the top 20 exposures are predominantly unsecured and this is a ratings negative. Initial assessments of the potential impact of the COVID-19 pandemic indicate that the bank will not be immune to the sector wide challenges which include credit extension and loan repayments. Though not significant, we expect some deterioration in asset quality and increased credit losses on account of the COVID-19 impact on some sectors and the deterioration of the exchange rate on FX loans.
The Funding and liquidity factor is a ratings positive taking into account an average funding structure and adequate liquidity. The bank is exposed to the same structural funding as most banks in Zimbabwe, namely demand customer deposits. The majority of deposits come from large corporates which typically are less behaviourally sticky than retail deposits. Therefore, the bank remains susceptible to external shocks, further exacerbated by the challenging operating environment and foreign currency shortages. However, liquidity is good mitigating structural funding risks. At 30 June 2020, FX liquid asset coverage of the FX funding base was very good at over 95%. Furthermore, GCR liquid asset coverage of customer deposits was adequate in the range of 70% to 80%.
The ratings benefit from support and integration of the bank with its ultimate parent, FMBcapital Holdings Group, although not a material asset or revenue contributor.
Outlook Statement
The outlook is evolving premised on the volatile operating environment, monetary policy, exacerbated by hyperinflation creating high likelihood of frequent change on the financial profiles of financial institutions operating therein. In this regard, GCR will increase monitoring and surveillance of rated peers.
Rating Triggers
National scale ratings reflect relativities to the local Zimbabwean peers only. Given the operating environment there is implied volatility in the ratings. A positive or negative ratings movement could follow a change in capitalisation, asset quality or liquidity.
Analytical Contacts
| Primary analyst | Vimbai Muhwati | Financial Institutions Analyst |
| Johannesburg, ZA | VimbaiM@GCRratings.com | +27 11 784 1771 |
| Committee chair | Corné Els | Senior Structured Finance & Securitisation Analyst |
| Johannesburg, ZA | CorneE@GCRratings.com | +27 11 784 1771 |
Related Criteria and Research
| Criteria for the GCR Ratings Framework, May 2019 |
| Criteria for Rating Financial Institutions, May 2019 |
| GCR Ratings Scales, Symbols & Definitions, May 2019 |
| GCR Country Risk Scores, May 2020 |
| GCR Financial Institutions Sector Risk Score, July 2020 |
| Jurisdictional Supplement for Criteria, July 2020 |
Ratings History
First Capital Bank Zimbabwe Limited
Risk Score Summary
| Rating Components & Factors | Risk Scores |
| Operating environment | 1.00 |
| Country risk score | 0.00 |
| Sector risk score | 1.00 |
| Business profile | 1.00 |
| Competitive position | 1.00 |
| Management and governance | 0.00 |
| Financial profile | 2.00 |
| Capital and Leverage | 2.00 |
| Risk | (0.50) |
| Funding and Liquidity | 0.50 |
| Comparative profile | 0.50 |
| Group support | 0.50 |
| Government support | 0.00 |
| Peer analysis | 0.00 |
| Total Score | 4.50 |
Glossary
| Balance Sheet | Also known as 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. |
| Capital | The sum of money that is invested to generate proceeds. |
| Cash | Funds that can be readily spent or used to meet current 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. |
| Diversification | Spreading risk by constructing a portfolio that contains different exposures whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in. |
| Exposure | Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For a company, its exposure may relate to a particular product class or customer grouping. Exposure may also arise from an overreliance on one source of funding. In insurance, it refers to an individual or company’s vulnerability to various risks |
| Income | Money received, especially on a regular basis, for work or through investments. |
| 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. |
| Issuer | The party indebted or the person making repayments for its borrowings. |
| Leverage | With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt. |
| 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 Rating | See GCR Rating Scales, Symbols and Definitions. |
| Margin | A term whose meaning depends on the context. In the widest sense, it means the difference between two values. |
| Market | An assessment of the property value, with the value being compared to similar properties in the area. |
| Maturity | The length of time between the issue of a bond or other security and the date on which it becomes payable in full. |
| Rating Outlook | See GCR Rating Scales, Symbols and Definitions. |
| Risk | The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives. |
| Short Term Rating | See GCR Rating Scales, Symbols and Definitions. |
| Short Term | Current; ordinarily less than one year. |
SALIENT POINTS OF ACCORDED RATING
GCR affirms that a.) no part of the rating process 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.
The credit ratings have been disclosed to First Capital Bank Zimbabwe Limited. The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings.
First Capital Bank Zimbabwe Limited participated in the rating process via video conference management meetings, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The information received from First Capital Bank Zimbabwe Limited and other reliable third parties to accord the credit ratings included:
- The audited financial results to 31 December 2019
- Unaudited management accounts as at 30 June 2020
- Breakdown of facilities
- Banking sector information and Industry comparative data
- Other related documents.
Due to severe foreign currency shortages, hyperinflation and significant monetary and exchange control policy changes over the last 12-18 months in our opinion, the national scale credit ratings on Zimbabwean entities are not directly comparable to credit ratings and risk scores within other markets. Furthermore, outlook statements may fail to capture forward looking trends due to the extreme volatility in the operating environment and audited opinions. See the latest Jurisdictional Supplement for Criteria, published July 2020.
