Announcements

GCR affirms First Merchant Bank Limited’s rating of A+(MW); Outlook Stable.

Johannesburg, 29 July 2014 – Global Credit Ratings has affirmed the national scale ratings assigned to First Merchant Bank Limited of A+(MW) and A1(MW) in the long term and short term respectively; with the outlook accorded as Stable. The ratings are valid until 07/2015.

SUMMARY RATING RATIONALE

Global Credit Ratings has accorded the above credit rating(s) to First Merchant Bank Limited based on the following key criteria:

The accorded ratings reflect First Merchant Bank Limited’s (“FMB” or “the bank”) domestic franchise value, resilient financial performance, and its ability to adapt to changes and eventualities in the regional risk landscape. These are however, partially offset by shifts in both global and domestic risk dynamics, which continue to negatively impact the local economy.

A risk weighted capital adequacy (“RWCA”) ratio of 17.6% was reported as at FYE13 (FYE12: 23.2%), calculated in-line with Basel I requirements (statutory minimum of 10%). However, effective January 2014, capital adequacy will be calculated in-line with Basel II requirements. Monthly returns submitted to the central bank, indicate that the bank had a RWCA ratio of 20.6% as at May 2014, against a prudential minimum of 15%.

Measured at FYE13, the underlying quality of FMB’s loan book showed some deterioration with the capital value in arrears position increasing to 4.6% of gross advances, compared to 3.7% previously. Provisions covered 76.2% of arrears, down from 80.0% in F12. Provisions against all impaired loans are based on the net recoverable amount (after taking into account collateral). Net non-performing loans (“NPLs”) remained negligible relative to capital and net advances at 1.8% and 1.2% respectively. Notwithstanding this, cognisance was taken of the highly concentrated advances book, with the 10-largest advances comprising 65.7% of the loan portfolio as at FYE13.

The bank recorded a net profit before tax of MK7.8bn for F13, up 85.4% from the previous period. Higher net interest margins, significant gains on foreign exchange transactions and growth in fees & commission income were the major contributors to the strong earnings performance. Profitability indicators strengthened, with the ROaE and ROaA ratios climbing to 44.9% and 10.0% respectively as at FYE13.

In light of the high regulatory liquidity requirement, FMB maintains a highly liquid balance sheet. The bank’s liquidity ratio amounted to 46.5% as at FYE13, well above the statutory minimum of 30%. GCR does, however, take note of FMB’s recent acquisition of ICB Financial Group Holdings Limited’s banking subsidiaries in Malawi, Mozambique and Zambia, and the likely impact on earnings and capital going forward. Although the board is structured in-line with the existing banking regulations and corporate governance guidelines in Malawi, the absence of an ample number of independent directors at board level was noted.

Continued solid financial performance and integration of recent acquisitions, while maintaining credit protection factors and a further strengthening of the bank’s competitive position in the domestic market could lead to an upward ratings migration. Downward pressure on the bank’s earnings and asset quality problems (associated with inadequately controlled growth and weak credit administration), the uncertain macro-economic environment, and a weakened global economic outlook could see the ratings come under pressure.

For a detailed glossary of terms utilised in this announcement please click here

NATIONAL SCALE RATINGS HISTORY

Initial rating (July/2007)
Long term: A+(MW); Short term: A1(MW);
Outlook: Stable

Last rating (Jul/2013)
Long term: A+(MW); Short term: A1(MW);
Outlook: Stable

ANALYTICAL CONTACTS

Primary Analyst
Jennifer Mwerenga
Senior Credit Analyst
(011) 784-1771
jennifer@globalratings.net

Committee Chairperson
Dirk Greeff
Head: Financial Institution Ratings
(011) 784-1771
dgreeff@globalratings.net

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Banking Criteria (updated April 2014)
Glossary of Terms/Ratios (February 2014)
Previous Rating Reports (up to 2013)

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.

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.

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 rating/s has been disclosed to First Merchant Bank Limited with no contestation of the rating.

The information received from First Merchant Bank Limited and other reliable third parties to accord the credit rating included the December 2013 audited annual financial statements (plus four years of comparative numbers), latest internal and/or external management reports, 2014 budgeted financial statements, May 2014 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 RATING ANNOUNCEMENT

Asset Quality

The ability of a bank’s assets, especially its loans, to continue to perform according to its terms and generate net interest income for the bank.

Balance Sheet

Basic financial statements, usually accompanied by appropriate disclosures that describe the basis of accounting used in its preparation and presentation of a specified date the entity’s assets, liabilities and owners’ equity. Also known as a statement of financial position.

Basel

Basel Committee on Banking Supervision housed at the Bank for International Settlements.

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

The manner in which an entity is governed and decisions are undertaken.

Credit Rating Agency

A party that provides an opinion on the credit quality of assets, debt securities and companies.

Credit risk

Risk that a party to a contractual agreement or transaction will be unable to meet their obligations or will default on commitments. Credit risk can be associated with almost any transaction or instrument such as swaps, repos, CDs, foreign exchange transactions, etc. Specific types of credit risk include sovereign risk, country risk, legal or force.

Default

Failure to make loan payments on a timely basis or to comply with other terms/requirements as stipulated in the loan agreement.

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 and its results of operations for a period then ended.

Franchise

Business or banking franchise; a bank’s business.

Income Statement

Summary of the effect of revenues and expenses over a period of time.

Liquidity Risk

Liquidity is the ability to fund increases in assets and meet obligations as they become due, without incurring unacceptable losses.

Net Interest Margin

Net interest margin is the net interest income divided by average interest earning assets.

Non-performing loan

When a borrower is overdue, typically 90 + days in arrears or as defined in the transaction documents.

Sovereign Risk

The risk of default by the government of the country on its obligations.

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