Johannesburg, 29 July 2016 – 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 July 2017.
SUMMARY RATING 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:
The ratings of First Merchant Bank Limited (“FMB”, “the group”) reflect its established domestic market position and growing regional footprint, risk appropriate capitalisation, adequate loan loss reserves and comfortable liquidity. The group, however, remains under significant pressure from ongoing domestic operating environment challenges (including weather related shocks impacting food security; exchange rate volatility; delays in receipt of, or reduction, in aid flows; and a weak global market), as well as adverse economic developments from target regional markets, that exacerbate downside risks to asset quality and profitability.
FMB has grown its regional presence, entering the Zambia and Mozambique markets in F13, in addition to its existing presence in Botswana. The group’s external assets (outside Malawi) contributed 18.1% of FMB’s consolidated assets at FYE15 (FYE14: 19.0%).
FMB’s capitalisation is adequate on a consolidated basis, calculated in line with the Basel II minimum capital standards, effective 1 January 2014. The group reported a total risk weighted capital adequacy ratio of 20.3% (FYE14: 20.1%) and Tier 1 risk based capital ratio of 13.2% (FYE14: 12.7%) at FYE15, which were above the regulatory minima of 15% and 10% respectively.
Asset quality remains under significant pressure from weak domestic activity and negative trends in the operating environment (including rising interest rates, depreciating currencies and strong inflationary pressures) across all markets. The gross non-performing loan (“NPL”) ratio remained high, although declining to 10.2% at FYE15 (FYE14: 12.1%), partly due to 30.6% growth in gross loans and increased (141.8%) NPL write-offs. The domestic industry average gross NPL ratio stood at 10.7% at FYE15 (FYE14: 14.9%). Positively, the Reserve Bank of Malawi (“RBM”, “central bank”) issued a directive in May 2014 introducing the Expected Recoverable Amount Method (“ERAM”) to determine appropriate levels of loan loss provisions. The ERAM imposes a provisioning rate that increases by 16.67 percentage points per quarter on NPLs over 90 days past due. The higher and graduated provisioning rate is expected to strengthen banking sector resilience and improve banks’ ability to deal with adverse developments. Specific provisions (raised in line with RBM guidelines) covered 68.4% of NPLs at FYE15 (FYE14: 99.6%), pre-collateral. The ratio of NPLs net of provisions to the bank’s regulatory capital remained low at 5.4% at FYE15 (FYE14: 0.1%). Although a structural feature in operating markets (particularly in Malawi), FMB displays top 10 borrower concentration of 33.4% of the total loan portfolio at FYE15 (Malawi operations), which heightens default risk.
Despite significant growth in interest income, pre-tax profit decreased by 21.9% to MWK5.9bn in F15 (F14: 8.2% decrease), mainly driven by the significant decline in non-interest income and increase in operating costs. The ROaA decreased to 3.0% in F15 (F14: 5.5%), which was above the RBM benchmark of 2.5%, although slightly below the industry average of 3.1%. Following a similar trend, the ROaE declined to 17.3% in F15 from 27.0% in F14.
In light of the high regulatory liquidity requirement, FMB maintains a highly liquid balance sheet. The bank’s liquidity ratio was 56.8% at FYE15, well above the statutory minimum of 30%.
Strong financial metrics in terms of profitability, asset quality and capitalisation, and a further strengthening of the bank’s competitive position in the domestic market, could lead to upward ratings migration. Furthermore, upside potential would probably require notable improvements in the operating environment. GCR also takes note of the need to further strengthen the core capital base and reduce credit portfolio concentration risk. Conversely, a further weakening in earnings and asset quality (as reflected by NPLs in both nominal and percentage terms), a notable decline in liquidity and capital adequacy metrics and worsening economic conditions across operating jurisdictions, would place ratings under pressure.
NATIONAL SCALE RATINGS HISTORY
|Initial rating (July 2007)|
|Long-term: A+(MW); Short-term: A1(MW)|
|Last rating (July 2015)|
|Long-term: A+(MW); Short-term: A1(MW)|
|Primary Analyst||Committee Chairperson|
|Jennifer Mwerenga||Omega Collocott|
|Senior Credit Analyst||Sector Head: Financial Institution Ratings|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2016
FMB rating reports (2007-15)
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 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 ratings included:
- Audited financial results of the bank at 31 December 2015 (plus four years of comparative numbers);
- Unaudited management accounts of the bank as at 31 May 2016;
- Budgeted financial statements for 2016;
- 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 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.|
|Bad Debt||An amount owed by a debtor that is unlikely to be paid due, for example, to a company going into liquidation. There are various technical definitions of what constitutes a bad debt, depending on accounting conventions, regulatory treatment and the individual entity’s own provisioning and write-off policies.|
|Basel||Basel Committee on Banking Supervision housed at the Bank for International Settlements.|
|Basel I||Basel Committee regulations, which set out the minimum capital requirements of financial institutions with the goal of minimising credit risk.|
|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.|
|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.|
|Downgrade||The assignment of a lower credit rating to a company or sovereign borrower’s debt by a credit rating agency. Opposite of upgrade.|
|Equity||Equity (or shareholders’ funds) is the holding or stake that shareholders have in a company. Equity capital is raised by the issue of new shares or by retaining profit.|
|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.|
|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.|
|Maturity||The length of time between the issue of a bond or other security and the date on which it becomes payable in full.|
|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.|
|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.|
|Shareholder||An individual, entity or financial institution that holds shares or stock in an organisation or company.|
|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 detailed glossary of terms utilised in this announcement please click here
GCR affirms First Merchant Bank Limited’s rating of A+(MW); Outlook Stable.