Johannesburg, 26 November 2015 — Global Credit Ratings has today 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 has accorded the above credit rating(s) to FirstRand Bank Limited (“FRB” and/or “the bank”) based on the following key criteria:
The ratings of FRB reflect its solid franchise as one of South Africa’s largest financial institutions, with a 21.4% market share of total assets, and a strong corporate and retail business base. The ratings also reflect FRB’s strong risk management infrastructure and resilient financial performance, underpinned by good asset quality metrics, sound capitalisation, and adequate profitability. These strengths are, however, partially offset by an increasingly challenging operating environment, characterised by an economic slowdown and consequent weakening credit environment.
FRB (a wholly owned subsidiary of FirstRand Limited) 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.
Since F14, the bank has built up capital at a rate in excess of that being consumed for organic growth, recording a total capital/total assets ratio of 7.9% at FYE15 (FYE14: 7.5%). On a risk adjusted basis, the bank’s capital adequacy ratio increased to 16.9% at FYE15 (FYE14: 16.1%), remaining well above the industry average of 15.4% and minimum regulatory requirement of 10%. The increase in capitalisation has been a function of sound earnings retention, combined with a share issuance to the value of R1.5bn in F15 (supporting the bank to maintain its capital buffer well in excess of Basel 3 requirements).
After trending downwards for the prior three years, total non-performing loans (“NPLs”) increased by 3.8% during F15, due to an economic slowdown exacerbated by power shortages, higher inflation and a rising interest rate cycle. Nonetheless, the bank’s loan portfolio remains healthy, exhibiting the lowest gross NPL ratio amongst the four largest banks in South Africa (2.2% at FYE15). This reflects the bank’s strong underwriting standards and diversified loan book. Specific provisioning coverage remained in the 32-34% range. While the South African economy remains pressurised by a softening in global demand and lower non-oil commodity prices, its large corporates generally have low leverage and sufficient liquidity enabling them to weather these economic challenges, supporting banks’ asset quality. Furthermore, FRB indicated that it has tightened its lending criteria in light of the expected headwinds in the periods ahead.
FRB recorded a 22.4% rise in earnings in F15, supported by growth in loans and advances (mainly corporate and wholesale compared to more moderate retail growth), its ability to grow/retain core transactional income, lower impairment charges and cost containment. Consequently, the bank delivered an improved ROaE and ROaA of 23.4% and 1.7% in F15 respectively (F14: 22.7% and 1.6%). Balance sheet growth continues to be supported by FRB’s ability to raise funding through deposits and capital markets. Given market conditions and the regulatory environment, the bank increased its holdings of liquid assets and exceeded the 60% minimum Liquidity Coverage Ratio (“LCR”), with a LCR of 84% at FYE15. Going forward, funding mobilisation is expected to remain sound, although at marginally higher costs due to rising interest rates, stricter liquidity requirements and a challenging operating environment.
Upside rating potential is currently constrained by the challenging operating conditions in South Africa, together with sovereign linked risk. Downward pressure on FRB’s ratings could stem from a further deterioration in macroeconomic conditions, which could adversely affect its asset quality, capital base and earnings power. 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 RATING HISTORY|
|Initial rating (December 2010)||Initial rating (November 2013)|
|Long term: AA(ZA); Short term: A1+(ZA)||Long-term: BBB|
|Outlook: Stable||Outlook: Stable|
|Last rating (November 2014)||Last rating (November 2014)|
|Long term: AA(ZA); Short term: A1+(ZA)||Long-term : BBB|
|Outlook: Stable||Outlook: Negative|
|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 Master Criteria for Rating Banks and Other Financial Institutions, updated March 2015
South Africa Bank Bulletin (June 2015)
FirstRand rating reports (2010-14)
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.
The credit rating(s) above were not solicited by, or on behalf of, the rated client, and therefore, GCR has not been compensated for the provision of the rating(s). The ratings were accorded based on publicly available information.
The credit rating(s) 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 rating(s) included the 30 June 2015 audited financial statements (plus four years of comparative numbers); banking sector information (as supplied in the BA900 Reserve Bank of South Africa reports); and other publicly available information.
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||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 (i.e. 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.|
|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.|
|Capital Base||The issued capital of a company, plus reserves and retained profits.|
|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 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.|
|Creditworthiness||An assessment of a debtor’s ability to meet debt obligations.|
|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.|
|Default||Failure to meet the payment obligation of either interest or principal on a debt or bond. Technically, a borrower does not default, the initiative comes from the lender who declares that the borrower is in default.|
|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.|
|Franchise||Business or banking franchise; a bank’s business.|
|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||ISRs relate to either foreign currency or local currency commitments, assessing the capacity of an issuer to meet these commitments using a globally applicable (and therefore internationally comparable) scale.|
|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.|
|National Scale Rating||The national scale 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.|
|Non-Performing Loan||When a borrower is overdue, typically 90+ days in arrears or as defined by the lender, or in the transaction documents.|
|NPL Ratio||The ratio of non-performing loans and advances to total gross loans and advances, expressed as a percentage.|
|Off Balance Sheet||Off balance sheet items are assets or liabilities that are not shown on a company’s balance sheet. They are usually referred to in the notes to a company’s accounts.|
|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.|
|Principal||The total amount borrowed or lent, e.g. the face value of a bond, excluding interest.|
|Provision||The amount set aside or deducted from operating income to cover expected or identified loan losses.|
|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.|
|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.|
|Solvent||The state of a company where its assets exceed its liabilities and it is able to service its debt and meet its other obligations, especially in the long-term.|
GCR affirms FirstRand Bank Limited’s rating of AA(ZA); Outlook Stable.