Announcements

GCR affirms FirstRand Bank Limited’s rating of AA(ZA); Outlook Stable.

Johannesburg, 18 Nov 2014 — 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 Stable. Furthermore, Global Credit Ratings has affirmed the international scale rating assigned to FirstRand Bank Limited of BBB; with the outlook accorded as Negative.

SUMMARY RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit rating(s) to FirstRand Bank Limited (“FirstRand” or “the bank”) based on the following key criteria:

The accorded ratings reflect FirstRand’s strong domestic franchise (with a market share of c.21% in terms of assets); diversified income streams; improving asset quality/performance indicators, despite the weakening credit environment in South Africa; and robust capitalisation metrics, benefitting from sound internal capital generation. Nevertheless, these are partly offset by an increasingly challenging operating environment, characterised by rising domestic interest rates and inflation, and an uncertain local business outlook.

FirstRand’s ratings are underpinned by the high probability of systemic support in case of need, given the bank’s significant (c.20%) market share of deposits, and its position as one of the leading banking groups in the country.

FirstRand operates a decentralised model with separate brands for each of its three main divisions, namely: First National Bank, representing activities in retail and commercial banking; Rand Merchant Bank, representing activities in corporate and investment banking; and WesBank, representing activities in asset-based finance.

FirstRand is well capitalised for current risk levels, with a total risk weighted capital adequacy ratio of 16.1% at FYE14 (compared to a regulatory minimum of 10%), calculated in line with Basel III capital requirements, as currently applicable in South Africa. FirstRand’s funding profile reflects the structural funding issues associated with the domestic banking sector (albeit, the bank has continued to reduce its reliance on institutional funding).

Total non-performing loans continued to trend downwards, comprising 2.3% of gross advances at FYE14 (FYE13: 2.8%), but showed a mixed picture across the bank’s portfolios.

The bank delivered resilient headline earnings of R12.6bn in F14 (up by 16.2% y/y), on the back of solid top line growth, which translated into a strong return profile (ROaE of 22.7%).

The bank’s deteriorating operating environment increases the error margin on all forward looking scenarios. This, combined with sovereign linked risk, makes an upgrade unlikely at this stage. In the longer term, a sustained improvement in business profile, asset quality, capital and earnings would be positively considered. The national scale ratings will be sensitive to a deterioration in asset quality, long-term earnings prospects and capital 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 (Dec/2010) Initial rating (Nov/2013)
Long term: AA(ZA); Short term: A1+(ZA) Long term: BBB
Outlook: Stable Outlook: Stable
Last rating (Jul/2014) Last rating (Jul/2014)
Long term: AA(ZA); Short term: A1+(ZA) Long term: BBB
Outlook: Stable Outlook: Negative

ANALYTICAL CONTACTS

Primary Analyst

Kurt Boere

Credit Analyst

(011) 784-1771

boere@globalratings.net

Committee Chairperson

Omega Collocott

Head: Financial Institution Ratings

(011) 784-1771

omegac@globalratings.net

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Banking Criteria (updated April 2014)

Banking Sector Bulletin (June 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; 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.

FirstRand Bank Limited did not participate in the rating process, though GCR is satisfied that the public information available was sufficient.

The credit rating/s has been disclosed to FirstRand Bank Limited with no contestation of the rating.

The ratings above are unsolicited and accorded based on publicly available information.

The information required to analyse FirstRand Bank Limited and accord the credit rating(s) typically encompasses the latest audited annual financial statements as at 30 June 2014 (plus four years of comparative numbers) and banking sector information (as supplied in the BA900 Reserve Bank of South Africa reports).

GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S FINANCIAL INSTITUTIONS GLOSSARY

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.

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.

Interest Rate

The amount paid by a borrower to a lender in exchange for the use of the lender’s money for a certain period of time. Interest is paid on loans or on debt instruments, such as notes or bonds, either at regular intervals or as part of a lump sum payment when the issue matures.

Liquidity Risk

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

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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ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK:HTTP://GCRRATINGS.COM. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT WWW.GCRRATINGS.COM/RATING_INFORMATION. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR's CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THIS SITE.

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