Johannesburg, 14 December 2018 — 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 long-term local currency rating assigned to FirstRand Bank Limited of BB+; with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to FirstRand Bank Limited (“FRB”, “the bank”) based on the FirstRand Group analysis (‘the group’) reflecting the following factors:
Johannesburg based-FRB is the core operating entity of the FirstRand Group. The group is a top tier financial services provider predominantly operating in the oligopolistic South African banking sector. Geographic diversification has improved materially in recent periods with the acquisition of Aldermore and the continued growth of the rest of Africa business. At 30 June 2018, the rest of Africa and the United Kingdom accounted for 8% and 21% of total loans, respectively. Predominantly, FirstRand Group is banking focused; however within South Africa the group is broadening the financial services offering to include long and short-term insurance to complement the already solid franchise in asset management and private equity. The goal is to capture the entire financial life of the FirstRand customer base, largely through digital channels. Over the medium to long term this will improve revenue diversification and help the group fend off increasing competition in the South African financial services space. Over the last 5 years, revenue stability and creation has been strong for the group, relative to domestic banking sector peers, with return on assets averaging over 2% and return on equity averaging over 23%, despite the struggling operating environment.
The capitalisation of the group is considered to be just-adequate. The total capital adequacy ratio of the group post IFRS 9 implementation and on a fully loaded basis was 14.6% at July 1st 2018, predominantly made up of high-quality tier one capital (common equity tier one (“CET1”) was 11% and Tier 1 ratio was 11.6% at the same date). There was a material reduction in the 2018 financial year (ending 30 June 2018) of the tier one ratios. This was due to the acquisition of Aldermore, the higher than anticipated risk weighted asset growth and the impact of South Africa’s local currency downgrade. Then at 1 July 2018, upon the adoption of the IFRS 9 and 15 accounting standards, the CET1 and Tier 1 ratio reduced again by c.50bps on a fully loaded basis. As a result, the group is below its published tier 1 capital range, albeit still being at the top of the CET1 range. Nevertheless, we believe that internal capital generation will support strong capital growth over the next two years, slowly reversing the decline seen in the past 12 months.
The risk position of the bank is considered to be broadly in line with the sector, albeit with a more positive track-record of credit losses through the cycle than top tier peers. Over the past five years the credit loss ratio has averaged below 1%, in comparison to a top tier sector average of over 1%. The impact of IFRS 9 was significant, with balance sheet provisioning increasing to R29bn from R21bn (including interest in suspense). Approximately 33% of the new impairments came from stage 3, partially because of the change in the write-off point of unsecured loans and change in default definition (including distressed restructures and technical cures), which led non-performing loans to increase to 2.9% of total loans under IFRS 9 from 2.4% under IAS 39. Positively, the loan loss reserve coverage has improved materially to 86.8% from 69.9%. As the GCR review is conducted on an unsolicited basis, GCR cannot ascertain the degree of the single name concentration risk; however, given the well diversified South Africa economy and high amount of retail lending GCR don’t expect it to be material. Industry concentrations are broadly in line with the market, albeit with less construction and real estate and more corporate lending than some peers.
Funding and liquidity are considered to be adequate. The group is exposed to the same structural funding risks of the other top tier South African banks, i.e. medium-term wholesale funding concentrations with the financial corporates, however GCR believe to a slightly lesser extent given the success of its deposit mobilisation. The net stable funding ratio for the group was 112%; again well above the regulatory limits of 100%, which has been altered from global norms for the aforementioned structural funding risks. Liquidity is considered to be sound, helped by the closed Rand system and dominance of the major banks in clearing and payments. The group exceeded the regulatory minimum liquidity coverage ratio by an average of 1500bps, reflecting strong growth in the high-quality liquid assets through the year.
GCR factors in no external support into the ratings.
The outlook is stable. Although not anticipated, GCR could raise the rating upon material revenue diversification and increased capitalization and we could lower the rating if tier 1 capital drops below 10%, cost of risk goes above 1.5% or if earnings prove to be less resilient.
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 (International LC): BBB|
|Outlook: Stable||Outlook: Stable|
|Last rating (November 2017)||Last rating (June 2018)|
|Long-term: AA+(ZA); Short-term: A1+(ZA)||Long-term (International LC): BB+|
|Outlook: Stable||Outlook: Stable|
|Primary Analyst||Secondary Analyst|
|Matthew Pirnie||Kudzanai Samanga|
|Sector Head: Financial Institution Ratings||Junior Credit Analyst|
|(011) 784-1771||(011) 784-1771|
|Sector Head: Structured Finance Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2017
FirstRand rating reports (2010-17)
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.
FirstRand Bank Limited has participated in the rating process via 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 FirstRand Bank Limited.
The information utilised to accord the credit ratings included:
- Audited financial results of the bank at 30th June 2018 (plus four years of comparative numbers);
- IFRS 9 transition information
The ratings above are unsolicited and accorded based on 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 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.|
|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.|
|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.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|Collateral||Asset provided to a creditor as security for a loan.|
|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.|
|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.|
|Diversification||Spreading risk by constructing a portfolio that contains different investments, whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.|
|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.|
|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.|
|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, and how the position may change in the future with regard to meeting longer term financial obligations.|
|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.|
|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.|
|Settlement||Full repayment of an obligation.|
|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 please click here
GCR affirms FirstRand Bank Limited’s rating of AA+(ZA); Outlook Stable.