Johannesburg, 31 July 2017 – Global Credit Ratings (“GCR”) has affirmed First Merchant Bank Limited’s long-term and short-term national scale ratings of A+(MW) and A1(MW) respectively; with the outlook accorded as Positive. The ratings are valid until July 2018.
SUMMARY RATINGS RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to First Merchant Bank Limited (“FMB”, “the group”) based on the following key criteria:
FMB operates both as a licensed commercial bank in Malawi and a holding company for the group’s subsidiaries. The accorded ratings reflect FMB’s established domestic market position and growing regional footprint in the Southern African Development Community (“SADC”) region, including three cross border banking subsidiaries (Botswana, Mozambique and Zambia) and two local non-banking subsidiaries (finance leasing and asset management).
The ratings also reflect FMB’s risk appropriate capitalisation, comfortable liquidity, resilient earnings performance, as well as geographic and earnings diversity. However, operating conditions remain difficult in target markets (currency weaknesses, strong inflationary pressures and high interest rates), increasing downside risks on loan quality and earnings particularly in Malawi, Mozambique and Zambia.
The group’s external assets (outside Malawi) contributed 47.8% (FY15: 47.3%) of consolidated assets and 29.8% (FY15: 9.4%) of pre-tax profit at FY16. The bulk of the group’s assets are in Malawi (52.2%) and Botswana (34.0%). Non-banking subsidiaries contributed 3.9% of consolidated assets and 7.8% of pre-tax profit at FY16.
FMB reported a total risk weighted capital adequacy ratio (“CAR”) of 21.1% (FY15: 20.2%) and Tier 1 risk based capital ratio of 13.9% (FY15: 12.6%) at FY16 on a consolidated basis, both of which were above the regulatory minima (Basel II) of 15% and 10% respectively, providing a buffer to absorb credit losses. At a subsidiary level, all banking operations met the minima required by respective regulatory authorities. Notwithstanding this, IFRS 9 (set to be implemented in 2018) is expected to lead to higher provisioning and earlier recognition of credit losses. FMB management expects a transitional increase in balance sheet provisions in line with IFRS 9 requirements, although the probable impact on earnings and regulatory capital is still to be determined. The bank has engaged external consultants to assist in assessing the likely impact as well as implementing the expected credit loss model to ensure compliance with IFRS 9 with effect from 1 January 2018.
The group’s asset quality indicators improved during FY16, supported by loan growth, settlements and some write-offs. Impaired loans decreased by 18.8% at FY16. Consequently, gross NPLs declined to 6.6% of gross loans and leases at FY16 (FY15: 8.2%). The domestic industry average gross NPL ratio stood at 14.7% at 3Q 2016. The group targets a gross NPL ratio of less than 5%. Specific provisions covered 35.8% of NPLs at FY16 (FY15: 38.3%), pre-collateral. NPLs net of provisions amounted to 9.0% of regulatory capital at FY16 (FY15: 13.3%). Borrower concentration risk remains high (a structural feature particularly in Malawi), with the top 10 borrowers representing 49.4% of the total loan and leases portfolio at FY16 (Malawi operations), exacerbating credit risk.
Profit before tax grew by 83.8% in FY16 supported by growth in the loan book and trading of government securities, increases in fee and commission income, and gains on foreign exchange transactions. All subsidiaries recorded positive earnings, with Zambia and Mozambique reversing loss positions in the prior year emanating from significant devaluation of the local currencies. Profitability indicators improved with the ROaA and ROaE increasing to 27.2% (FY1%: 18.5%) and 2.6% (FY15: 2.3%) respectively in FY16.
In light of the high regulatory liquidity requirement and a conservative approach to risk management, FMB maintains a highly liquid balance sheet. The bank’s liquidity ratio was 52.9% at FY16, well above the statutory minimum of 30%.
Sustainable progress in the group’s market positioning, strong financial metrics in terms of profitability, asset quality and capitalisation, as well as further enhancement of geographic and earnings diversification benefits, could lead to upward ratings migration. GCR also takes note of the need to reduce credit portfolio concentration risk. However, a marked deterioration in earnings and asset quality (as reflected by NPLs in both nominal and percentage terms), a notable decline in liquidity and capital adequacy metrics, a diminution of diversification benefits and worsening economic conditions across operating jurisdictions, would place ratings under pressure.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (July 2007)||Last rating (July 2016)|
|Long-term: A+(MW); Short-term: A1(MW)||Long-term: A+(MW); Short-term: A1(MW)|
|Outlook: Stable||Outlook: Stable|
|Sector Head: Financial Institution Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions (March 2017)
FMB rating reports (2007-16)
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.
First Merchant 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 ratings have has been disclosed to First Merchant Bank Limited with no contestation of the ratings.
The information received from First Merchant Bank Limited and other reliable third parties to accord the credit rating included:
- Audited financial results of the bank at 31 December 2016 (plus four years of comparative numbers);
- Unaudited management accounts of the bank as at 30 June 2017;
- Budgeted financial statements for 2017;
- Corporate governance and enterprise risk framework;
- Reserving methodologies and capital management policy;
- Industry comparative data and regulatory framework; and
- A breakdown of facilities available and related counterparties.
The ratings above were solicited by, or on behalf of, First Merchant Bank Limited, 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.|
|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.|
|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.|
|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.|
|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.|
|Diversification||Spreading risk by constructing a portfolio that contains different investments, 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.|
|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.|
|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.|
|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.|
|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.|
|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.|
|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.|
|Portfolio||A collection of investments held by an individual investor or financial institution. They may include stocks, bonds, futures contracts, options, real estate investments or any item that the holder believes will retain its value.|
|Provision||The amount set aside or deducted from operating income to cover expected or identified loan losses.|
|Regulatory Capital||The total of primary, secondary and tertiary capital.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Risk Management||Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy.|
|Securities||Various instruments used in the capital market to raise funds.|
|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.|
|Settlement||Full repayment of an obligation.|
|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.|
For a glossary of terms please click here
GCR affirms First Merchant Bank Limited’s rating of A+(MW); Outlook Positive.