Rating Action
Johannesburg, 10 July 2020 – GCR Ratings (“GCR”) has affirmed the South African long and short-term issuer ratings of Investec Bank Limited at AA(ZA)/A1+(ZA). At the same time, the international scale long-term issuer rating has been affirmed at BB. The outlooks are Negative.
The rating action follows a reduction in the South African country and financial institutions sector risk assessments.
- On June 24, 2020, the South African Financial Institutions sector risk score was lowered to 7.5, from 8.0 previously. Click here to access link.
- The South African country risk score was also lowered to 7.0, from 7.5 previously, in a market alert released on the 27th May 2020. Click here to access link.
Combined, the above country and sector risk scores comprise the operating environment score, which is a key input into GCR’s ratings.
Rating Rationale
Investec Bank Limited’s (“Investec”) national and international scale ratings outlooks have been placed on Negative, reflecting the worsening operating environment in South Africa, leading to a broadly negative overlay on the South African financial institutions sector. The reduction in the operating environment score pressurises both the international and national scale ratings, and the expected weakening in earnings over the next 12 to 18 months is likely to constrain capital adequacy, which GCR already believes to be at the low end of the intermediate range. The highly uncertain economic climate may exert greater than anticipated stress on the bank’s earnings and asset quality which may necessitate downward rating action over the outlook horizon should these constrain the GCR capital adequacy ratio below 10%.
Investec’s key credit strength lies in its niche market focus (supported by its core high net worth client base) which is viewed to be more resilient to adverse economic conditions, allowing for a strong risk profile that is a key differentiator from the rest of the market. This notwithstanding, Investec is the smaller of the top tier banks at around 8.1% total asset market share (as at year-end 2020), limiting the business profile in GCR’s view. Furthermore, profitability is viewed to be below the peer average, moderating the broadly adequate capital and leverage assessment. Funding and liquidity follows systemic patterns, and so is viewed to be neutral to the rating.
The bank’s credit profile benefits from a strong risk assessment, supported by a very low Credit Loss Ratio (“CLR”) of below 0.4% over the past five years. GCR believes the COVID-19 pandemic will put upward pressure on the ratio over the next two years, particularly on the banks exposures to highly impacted sectors such as aviation, tourism, entertainment, hotels and leisure and trade finance (approximately 6.7% of the total book) and the commercial property portfolio (around 14% of total exposures). Furthermore, the bank reported that as at year-end 2020, R1bn in relief measures (including payment holidays) had been granted to clients due to COVID-19, with 88.5% of these reported as stage 1. GCR notes that this is in line with regulatory guidance, where exposures that have been granted COVID-19 relief measures such as payment holidays are not automatically considered to have been subject to a significant increase in credit risk and therefore do not alone result in a transfer across stages. Accordingly, in our view, prolonged economic strain could see a continued deterioration in the bank’s asset quality (particularly to the most vulnerable sectors highlighted above). In GCR’s opinion, credit losses to these exposures will likely rise over the next 12-18 months, but GCR expects the CLR to be within a reasonable range between 0.5-0.7%, still supportive of a strong risk profile. Furthermore, GCR believes the bank is better positioned to contain the CLR below 0.5% as more of the economy starts opening up and returning to normal operations.
Investec is the smaller of the top tier South African banks, with a market share of around 8.1% at year-end 2020 based on total industry assets. However, the niche market focus gives it a competitive edge in a segment that is viewed to be more resilient in times of economic stress. This provides a good core revenue base on which the bank can continue to build. As such, the assessment balances the strengths of the focused business model with comparatively lower scale and business diversity.
The capital score is below peers, with the GCR capital ratio expected to register just above 10% over the medium term in GCR’s view. Furthermore, profit margins are somewhat lower and more variable, with a higher proportion of market sensitive income (four year average: 13.4%) and lower net interest margins of around 2%. Going forward, GCR expects earnings to compress (through lower net interest margins, reduced fee and commission income and higher credit losses), with the GCR capital ratio likely to remain below peers. From a reporting standpoint, effective 1 April 2019, the bank attained regulatory approval to adopt the Foundation Internal Ratings Based (“FIRB”) approach for the measurement of credit capital. They await approval of their application to the South African Prudential Authority to convert to the Advanced Internal Ratings Based (“AIRB”) approach. The former resulted in a 1.3% uplift to the CET1 ratio (from 11.2% to 12.5% had the FIRB approach been applied as at 31 March 2019) while the latter is also expected to support a further rise of c.2% from its March 2020 reported CET1 ratio of 12.1%.
The funding structure is aligned to the rest of the market, where wholesale funds dominate deposits. The strategy of the bank remains diversifying the deposit base and increasing retail and longer term funding. Positively, Investec hold sufficient liquidity to meet short term obligations, which balances out the reliance on wholesale funding somewhat. The Net Stable Funding Ratio (“NSFR”) is in line with industry norms at 116.2%, while the bank holds slightly more of a liquidity buffer than peers with the Liquidity Coverage Ratio (“LCR”) tracking at a sound 133.2% at FY20. At this level, the bank is well positioned to handle any short term liquidity runs and facility drawdowns should economic conditions deteriorate further and maintain a good buffer above the revised regulatory minimum of 80%.
Outlook Statement
The Negative outlooks reflect the worsening operating environment in South Africa, exacerbated by the ongoing COVID-19 pandemic. The reduction in the operating environment score pressurises both the international and national scale, and the expected weakening in earnings over the next 12 to 18 months is likely to constrain capital adequacy, which GCR already believes to be at the low end of the intermediate range. The highly uncertain economic climate may exert greater than anticipated stress on the bank’s risk position which may necessitate downward rating action over the outlook horizon should these cause a reduction in the GCR capital adequacy ratio below 10%.
Rating Triggers
Should capital adequacy metrics weaken, and/or credit losses rise materially above expectations, negative rating action could be taken. The international scale rating could also be lowered if the country risk of South Africa deteriorates, most likely due to the weakening position of its sovereign. A reversion to a stable outlook could arise on the back of a sustainable improvement in capitalisation, maintenance of a strong risk profile and/or an improved outlook for the operating environment.
Analytical Contacts
| 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, May 2020 |
| GCR Financial Institutions Sector Risk Score, June 2020 |
Ratings History
Investec Bank Limited
| Rating class | Review | Rating scale | Rating class | Outlook | Date |
| Long Term issuer | Initial | National | AA-(ZA) | Stable | September 2000 |
| Last | National | AA(ZA) | Stable | August 2019 | |
| Initial | International | BBB | Stable | September 2000 | |
| Last | International | BB | Stable | August 2019 | |
| Short Term issuer | Initial | National | A1+(ZA) | N/a | September 2000 |
| Last | National | A1+(ZA) | N/a | August 2019 |
RISK SCORE SUMMARY
| Rating Components & Factors | Risk scores |
| Operating environment | 14.50 |
| Country risk score | 7.00 |
| Sector risk score | 7.50 |
| Business profile | 0.00 |
| Competitive position | 0.00 |
| Management and governance | 0.00 |
| Financial profile | 1.00 |
| Capital and Leverage | (1.00) |
| Risk | 2.00 |
| Funding and Liquidity | 0.00 |
| Comparative profile | 0.00 |
| Group support | 0.00 |
| Government support | 0.00 |
| Peer analysis | 0.00 |
| Total Score | 15.50 |
Glossary
| 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 the rated entity. The ratings of the following entities were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings.
Investec Bank Limited participated in the rating process via teleconference management meetings, and other 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 31 March 2020;
- Other publicly available information and
- Industry comparative data.
