Johannesburg, 28 September 2021 – GCR Ratings (“GCR”) has affirmed the unsolicited Namibian long and short-term national scale issuer ratings of First National Bank of Namibia Limited at AA+(NA)/A1+(NA) respectively. At the same time, the unsolicited South African long-term national scale rating has been affirmed at A+(ZA). The outlooks are Stable.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook / Watch|
|First National Bank of Namibia Limited||Long Term Issuer||National||AA+(NA)||Stable Outlook|
|Short Term Issuer||National||A1+(NA)||—|
|Long Term Issuer||National||A+(ZA)||Stable Outlook|
The unsolicited ratings of First National Bank of Namibia Limited (“FNB Namibia”) reflect the strengths and weaknesses of FirstRand Namibia Limited (“the group”). FNB Namibia is viewed as the core operating subsidiary of the group, accounting for the majority of total group assets and net profit after tax (“NPAT”). As such, the ratings of FNB Namibia are equalised to the sub-group (FirstRand Namibia Limited) Anchor Credit Evaluator (“ACE”).
The ratings affirmation reflects the group’s strength as a market leading financial services company in Namibia, with FNB Namibia holding very strong shares of total banking sector assets, advances and deposits. Furthermore, the group is part of one of the largest financial institutions on the continent (FirstRand Group) and benefits from the shared branding and franchise strength of the parent. This has translated into consistently strong and above peer Return On Assets (“ROA”), with good cost efficiencies and consistent capital management supporting above average capitalisation. Asset quality has also proven to be resilient with contained credit losses and non-performing loans (“NPLs”) well below the industry average. Good liquidity offsets some of the structural funding challenges of the bank (systemic issue) which exhibits a high reliance to wholesale funding.
FNB Namibia is one of the leading banks in Namibia with a strong market share across assets (29%), loans (30%) and deposits (29%). The group offers a diverse range of products in the local market, distributed through strong and well established regional franchises (including FNB Namibia retail and commercial banking, RMB corporate and investment banking and Wesbank instalment finance). The group is well positioned to benefit from its product offerings and scale, enabling it to deliver better than average returns that GCR believes can be sustained through the credit cycle.
The group has consistently maintained sound capitalisation, with the GCR total capital ratio exceeding peers. Earnings rebounded to pre-pandemic levels in June 2021, with ROA back up to 2.4%, from the review period low of 1.9% in FY20. This was supported by lower credit losses, while reduced cost of funding helped stabilise net interest margins. The group also benefits from a better than average cost-to-income ratio, optimising its scale efficiency in the market. Along with muted loan growth of 1% and negative risk weighted asset growth, the GCR total capital ratio stood at 16.9% at June 2021 (FY20: 15.6%). We think the GCR total capital ratio may remain elevated above 17% over the next two years as earnings momentum is sustained, loan growth averages between 3%-5%, and dividend cover remains consistent with historical levels.
The positive risk assessment reflects contained credit losses and below average NPLs. While asset quality metrics evidenced a deteriorating trend over the past four years, accelerating in 2020 due to the pandemic, the position improved in FY21 with credit losses recovering towards normalised levels of 0.8%, from a review period high of 1.8% (this included a provision overlay of NAD250m). Similarly, NPLs increased to 5.2% in FY21 (FY20: 4.4%), but remained below the industry average, and compared well to peers. The loan portfolio is predominantly retail secured lending (residential mortgages and vehicle asset finance represented stood at NAD16.7bn (or 53% of total loans)). The property market has been under pressure over the last three years, and there could be some medium-term asset quality pressure should households experience further strain. However, this situation has been managed well to date, and the lower interest rates should assist borrower repayment capacity, at least in the short-term.
Funding and liquidity is broadly in line with peers, but we have made a slight positive adjustment for the group’s sound GCR stable funds ratio of 92%, reflecting its sizeable equity and deposit base. Wholesale funding forms the bulk of system deposits and nominal amounts are quite market sensitive as evidenced by the 42% year-on-year contraction in negotiable certificate deposits during FY21. Retail deposits are more stable, cheaper forms of funding, representing 33% of total deposits at June 2021. Liquidity is good, with liquid asset coverage of customer deposits at 22% at June 2021. The bank continues to meet all regulatory liquidity requirements, and is also viewed to be adequately geared, with total loans to deposits at around 89%. The successive 1% loan growth over the past two years aided in preserving liquidity, while the outflow of institutional funding in 2021 did not have a material impact on overall liquidity, and going forward, lessened the reliance on wholesale funding. Sector wide loan growth is projected at around 3% going forward, and there may still be a degree of risk-aversion in the market despite the low interest yield, which may support deposit stability.
We consider the group to be of limited importance to the wider FirstRand Group (GCR risk score of 17.75), due to the relatively small contribution to group revenues. As a result, at the high current national scale rating levels, we haven’t factored in group support.
The strong stand alone credit profile of the group is expected to be sustained over the rating horizon. We believe most of the asset quality pressures have subsided, and credit losses and NPLs should stabilise at strong levels. This, in conjunction with more normalised operating conditions could underpin a sustained ROA above 2.4%, supportive of capital generative capacity and maintenance of existing loss absorption buffers. We think the funding structure will remain susceptible to bouts of market sensitivity, but good liquidity will continue to offset this deficiency.
At current rating levels, we believe the potential for upward ratings action is limited over the rating horizon. However, if the group sustains its existing stand-alone credit profile and GCR takes a positive view of group support, we could uplift the ratings. Conversely, should asset quality and capital deteriorate beyond GCR’s current expectation levels, negative rating action on the stand-alone credit profile could ensue, although this may be counterbalanced by a higher likelihood of group support at lower rating levels.
|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, August 2021|
|GCR Financial Institutions Sector Risk Score, September 2021|
First National Bank of Namibia Limited (Namibian Scale)
|Rating class||Review||Rating scale||Rating||Outlook||Date|
|Long Term Issuer||Initial||National||AA+(NA)||Stable||February 2007|
|Short Term Issuer||Initial||National||A1+(NA)||N/a||February 2007|
First national Bank of Namibia Limited (South African Scale)
|Rating class||Review||Rating scale||Rating||Outlook||Date|
|Long Term issuer||Initial||National||AA-(ZA)||Stable||February 2007|
RISK SCORE SUMMARY
|Rating Components & Factors||Risk scores|
|Country risk score||5.50|
|Sector risk score||6.00|
|Management and governance||0.00|
|Capital and Leverage||0.75|
|Funding and Liquidity||0.25|
|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 been disclosed to First National Bank of Namibia Limited. The ratings above were done on an unsolicited basis, and therefore, GCR has not been compensated for the provision of the ratings.
First National Bank of Namibia Limited 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 information received from the entities and other reliable third parties to accord the credit ratings included:
- Audited financial results as at 30 June 2021;
- Other publicly available information and
- Industry comparative data.