Johannesburg, 16 November 2016 — Global Credit Ratings has affirmed the national scale ratings assigned to FirstRand Bank Limited of AA(ZA) and A1+(ZA) in the long-term and short-term respectively; with the outlook accorded as Positive. Furthermore, Global Credit Ratings has affirmed the international scale local currency rating assigned to FirstRand Bank Limited of BBB-; with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings of FirstRand Bank Limited (“FRB”, “the bank”) based on the following key criteria:
The ratings of FRB reflect its solid position as one of South Africa’s largest financial institutions, with a 21.4% assets market share, and a significant corporate and retail business base. Furthermore, the ratings capture FRB’s strong risk management infrastructure and resilient financial performance, underpinned by good asset quality metrics, and sound capitalisation and earnings generation. These strengths are, however, partially offset by an increasingly challenging economic climate and consequent weakening credit environment.
The positive outlook on the long-term national scale rating is supported by market position increases over time, and capitalisation and Basel 3 liquidity/funding metric enhancements, accompanied by stable profitability which exceeded peer averages.
FRB (a wholly owned subsidiary of FirstRand Limited) operates a decentralised structure with separate brands for each of its three main divisions, namely: First National Bank (retail and commercial banking); Rand Merchant Bank (corporate and investment banking); and WesBank (instalment finance).
The bank has maintained its strong capital position, with risk-weighted capital adequacy ratios (“CAR”) remaining well above both the regulatory minima and internal targets. FRB’s Tier 1 CAR declined to 14.2% at FYE16 (FYE15: 14.6%) due to a 10% haircut on hybrid capital that is not recognised under Basel 3. Notwithstanding this, total CAR increased to 17.1% at FYE16 (FYE15: 16.9%), supported by the issuance of Tier 2 subordinated debt instruments amounting to R4.9bn. Furthermore, emphasis is being placed on maintaining the Basel 3 leverage ratio (a supplementary measure to the CARs) above the regulatory minimum and internal target of 4% and 5% respectively.
As a consequence of South Africa’s high indebtedness levels, poor employment prospects, higher interest rates, adverse commodity cycle, the continued deterioration in the macro environment, and the bank’s subsequent reduced risk appetite, retail and wholesale loan growth moderated in the period under review. Due to the aforementioned operating environment challenges, coupled with the reclassification of distressed loans, the bank’s gross non-performing loan (“NPL”) ratio increased to 2.5% at FYE16 (FYE15: 2.2%), while total provisioning coverage declined to 60.1% at FYE16 (FYE15: 64.9%). Notwithstanding this, asset quality indicators are still considered healthy, with provisions plus collateral fully covering arrears. The bank maintains stringent underwriting standards, rigorous post-disbursement monitoring and strong recovery procedures.
Although loan growth and higher interest rates supported a 17.6% increase in net interest income, as well as an improvement in the net interest margin, FRB’s pre-tax earnings grew by a lower 8.3% to R23.4bn in F16 (F15: 20.5%), constrained by a reduction in fair value gains and a rise in impairment charges. Reflecting continual cost containment measures, the bank’s cost ratio declined to 54.4% in F16 (F15: 56.4%). ROaE moderated to 22.7% (F15: 23.4%), while ROaA remained flat at 1.7% in F16.
The bank continues to build its deposit base and optimise its funding profile within structural and regulatory constraints. Given market conditions and the regulatory environment, the bank increased its holdings of liquid assets by utilising new market structures and the South African Reserve Bank committed liquidity facility. In this regard, FRB registered a Liquidity Coverage Ratio of 102% at FYE16, exceeding the 70% minimum phase in requirement. Furthermore, the bank estimates that it already exceeds the Net Stable Funding Ratio full implementation minimum requirement.
While GCR expects FRB to remain resilient, the prevailing macroeconomic challenges, coupled with ongoing political and policy uncertainty, increases downside risk for the bank’s assets quality indicators and earnings generation.
GCR has taken a positive view of the bank’s Basel 3 metrics, and simultaneous performance stability. The maintenance of healthy asset quality indicators, sound capitalisation and steady earnings may have a positive impact on the ratings. The national scale ratings will be sensitive to a deterioration in asset quality, long-term earnings prospects and capital/liquidity from current levels. Furthermore, the international scale rating will be sensitive to changes in the sovereign rating of the country.
The ratings above are unsolicited and accorded based on publicly available information.
|NATIONAL SCALE RATINGS HISTORY||INTERNATIONAL SCALE RATINGS HISTORY|
|Initial rating (December 2010)||Initial rating (November 2013)|
|Long-term: AA(ZA); Short-term: A1+(ZA)||Long-term (International LC): BBB|
|Outlook: Stable||Outlook: Stable|
|Last rating (December 2015)||Last rating (December 2015)|
|Long-term: AA(ZA); Short-term: A1+(ZA)||Long-term (international LC): BBB-|
|Outlook: Stable||Outlook: Stable|
|Primary Analyst||Committee Chairperson|
|Kuzivakwashe Murigo||Omega Collocott|
|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
South Africa Bank Bulletin (June 2016)
FRB rating reports (2010-15)
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 POINTS 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; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
The credit ratings above were not solicited by, or on behalf of, FirstRand Bank Limited, and therefore, GCR has not been compensated for the provision of the ratings. The ratings were accorded based on publicly available information.
The credit ratings above were disclosed to FirstRand Bank Limited with no contestation of/changes to the ratings.
FirstRand Bank Limited did not participate in the rating process, though GCR is satisfied that the public information available was sufficient.
The information used to analyse FirstRand Bank Limited and accord the credit ratings included:
• Audited financial results as at 30 June 2016 (and four years of comparative numbers)
• Banking sector information (as supplied in the BA900 Reserve Bank of South Africa reports)
• Industry comparative data
• Other publicly available information
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S FINANCIAL INSTITUTIONS GLOSSARY
|Arrears||An overdue debt, liability or obligation. An account is said to be ‘in arrears’ if one or more payments have been missed in transactions where regular payments are contractually required.|
|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.|
|Basel||Basel Committee on Banking Supervision housed at the Bank for International Settlements.|
|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.|
|Cost Ratio||The ratio of operating expenses to operating income. Used to measures a bank’s efficiency.|
|Credit Rating||An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.|
|Credit Rating Agency||An entity that provides credit rating services.|
|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.|
|Facility||The grant of availability of money at some future date in return for a fee.|
|Fair Value||The fair value of a security, an asset or a company is the rational view of its worth. It may be different from cost or market value.|
|Financial Institution||An entity that focuses on dealing with financial transactions, such as investments, loans and deposits.|
|Haircut||The percentage by which the market value of a security used as collateral for a loan is reduced. The size of the haircut reflects the expected ease of selling the security and the likely reduction necessary to realised value relative to the fair value.|
|Impairment||Reduction in the value of an asset because the asset is no longer expected to generate the same benefits, as determined by the company through periodic assessments.|
|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.|
|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.|
|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.|
|Net Interest Margin||Net interest income divided by average interest earning assets. Measures a bank’s margin after paying funding sources and how successful a bank’s interest-related operations are.|
|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.|
|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.|
|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.|
|Subordinated Debt||Debt that in the event of a default is repaid only after senior obligations have been repaid. It is higher risk than senior debt.|
|Under Review||Failure to carry out a full review of a rated entity within the designated timeframe, either through lack of information or delays in finalisation, i.e. review is ongoing.|
For a detailed glossary of terms utilised in this announcement please click here
GCR affirms FirstRand Bank Limited’s rating of AA(ZA); Outlook Positive.