Johannesburg, 8 July 2021 – GCR Ratings (“GCR”) has affirmed the unsolicited national scale long and short-term issuer ratings of FirstRand Bank Limited at AA+(ZA)/A1+(ZA), with the Outlook revised to Stable. At the same time, the unsolicited international scale long-term issuer rating has been affirmed at BB, with a Stable Outlook. GCR has also assigned an unsolicited short-term international scale rating of B,
The unsolicited international and national scale ratings on FirstRand Bank Limited (“FirstRand”) reflect the strengths and weaknesses of the FirstRand Group (“the group”), a large and diverse financial institution domiciled in South Africa. FirstRand is regarded as the core operating entity within the group and accounts for around 75% of group assets. Accordingly, the ratings of FirstRand are equalised to the group Anchor Credit Evaluator.
The ratings of the group reflect its strong competitive position within its core markets, supported by good geographic diversification through exposure to the United Kingdom, peer aligned capital and leverage, stabilising asset quality subsequent to the pandemic induced stress and good funding and liquidity commensurate with the structural characteristics of the core South African banking sector.
The group is a large integrated financial institution with leading positions in many of its operating markets underpinning a strong franchise value across its core business units. In South Africa, the group holds a strong competitive position in the oligopolistic banking sector with a 21.7% share of total assets and has leading brands in sub segments such as vehicle asset finance. The expansion in the United Kingdom (“UK”) offers meaningful geographic diversification to a developed market which ultimately supports a stronger operating environment score compared to peers. Going forward, should the UK operations increase their contribution to group assets, the competitive position score could be moderated to compensate for a higher country risk score. This is because of the relatively modest market position of the group’s UK operations, versus its stronger position in South Africa.
Despite the earnings shock of 2020, the GCR total capital ratio rose to 12% at half year December 2020 (from 11.4% at June 2020) supported by negative loan growth (and consequently a contraction of risk weighted assets), initial suspension of dividends and better than expected earnings. We think the GCR capital ratio will now trend between 12.0%-12.5% and may even be at the upper end of the range as loan book growth may remain muted in 2021, upward earnings momentum continues, and although dividends are set to resume, there may be some caution with regards to the pay-out ratio given existing uncertainties in the operating environment. Overall, we think the capital and leverage ratio will track close to peers and remain in the intermediate band.
Asset quality is considered to be in line with peers. After peaking in June 2020, GCR calculated credit losses moderated to 1.5% by December 2020 (from 1.9%) as better than expected loan book performance moderated the need for further provision overlays during the second half of the year. Non-performing loans (“NPLs”) were in line with the market at 4.8%, although continued to rise from the 2019 levels. As with peers, the pandemic was the key catalyst for the year-on-year asset quality deterioration, with much of the pressure arising from the retail banking business and the UK operations where most of the payment relief was provided. At December 2020, 12% of the group’s total gross advances received covid payment relief, while 4% were under extended relief. We think credit losses could stabilise at around 1.4%-1.5% over the next two years as the operating environment improves and lower credit losses are sustained in the second half of the 2021 financial year. NPLs could remain below 5% and aligned with the expected industry average. While we do not expect the 2020 credit shocks to repeat in the next 12-18 months, there could be some tail impact, especially in the UK business once government support to the economy is gradually withdrawn.
Funding and liquidity are considered to be good. 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, we believe the group is somewhat better placed due to success of its deposit mobilisation. This is evident through a slightly better cost of funding than some of the peers and a favourable Net Stable Funding Ratio (“NSFR”) of 125%. Complimenting this, is the sound liquidity position, with a group reported Liquidity Coverage Ratio (“LCR”) of 122%.
The Stable outlooks are based on the group’s strong and entrenched positions within its emerging market operations and growing UK business that may continue to support a stronger than peer operating environment assessment. We are expecting most top tier South African banks to report improved earnings in 2021 as transactional volumes normalise, there is less of an endowment impact supportive of higher net interest margins and credit losses stabilise. This should support intermediate capital and leverage for the group which we project will be at the higher end of the 12%-12.5% range. Stabilising asset quality, albeit with NPLs and credit losses still likely to remain above historical levels, coupled with a comparatively favourable funding base and sound liquidity is also expected to underpin a strong credit profile over the medium term.
Should the group be able to sustain a GCR capital ratio above 13.5%, while also reporting material improvements in asset quality through credit losses and NPLs below peers, upward ratings migration may ensue. Conversely, should asset quality deteriorate beyond expectations and the GCR capital ratio falls to below 10% on a consistent basis, then negative ratings action may arise. Downward ratings movement could also stem from a weakening in the operating environment of the group’s core exposures.
|Primary analyst||Vinay Nagar||Senior Financial Institutions Analyst|
|Johannesburg, ZA||Vinay@GCRratings.com||+27 11 784 1771|
|Committee chair||Matthew Pirnie||Group Head of Ratings|
|Johannesburg, ZA||MatthewP@GCRratings.com||+27 11 784 1771|
Related Criteria and Research
|Criteria for the GCR Ratings Framework, May 2019|
|Criteria for Rating Financial Institutions, May 2019|
|GCR Ratings Scale, Symbols & Definitions, May 2019|
|GCR Country Risk Scores, June 2021|
|GCR Financial Institutions Sector Risk Score, June 2021|
FirstRand Bank Limited
|Rating class||Review||Rating scale||Rating class||Outlook||Date|
|Long Term Issuer||Initial||National||AA(ZA)||Stable||December 2010|
|Short Term Issuer||Initial||National||A1+(ZA)||N/a||December 2010|
Risk Score Summary
|Rating Components & Factors||Risk scores|
|Country risk score||8.25|
|Sector risk score||7.50|
|Management and governance||0.00|
|Capital and Leverage||(0.50)|
|Funding and Liquidity||0.00|
|Balance Sheet||Also known as 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.|
|Capital||The sum of money that is invested to generate proceeds.|
|Cash||Funds that can be readily spent or used to meet current 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.|
|Diversification||Spreading risk by constructing a portfolio that contains different exposures 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.|
|Exposure||Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For a company, its exposure may relate to a particular product class or customer grouping. Exposure may also arise from an overreliance on one source of funding. In insurance, it refers to an individual or company’s vulnerability to various risks|
|Income||Money received, especially on a regular basis, for work or through investments.|
|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.|
|Issuer||The party indebted or the person making repayments for its borrowings.|
|Leverage||With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.|
|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 Rating||See GCR Rating Scales, Symbols and Definitions.|
|Margin||A term whose meaning depends on the context. In the widest sense, it means the difference between two values.|
|Market||An assessment of the property value, with the value being compared to similar properties in the area.|
|Maturity||The length of time between the issue of a bond or other security and the date on which it becomes payable in full.|
|Rating Outlook||See GCR Rating Scales, Symbols and Definitions.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Short Term Rating||See GCR Rating Scales, Symbols and Definitions.|
|Short Term||Current; ordinarily less than one year.|
SALIENT POINTS OF ACCORDED RATINGS
GCR affirms that a.) no part of the ratings was influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The credit ratings have not been disclosed to the rated entity. The ratings were unsolicited, and therefore GCR has not been compensated for the provision of the ratings.
FirstRand Bank Limited did not participate in the rating process, however, the quality of public disclosure from audited accounts and risk management booklets, alongside regulatory returns, meets our information sufficiency requirements.