Johannesburg, 8 July 2021 – GCR Ratings (“GCR”) has affirmed the national scale long and short-term issuer ratings of Investec Bank Limited at AA(ZA)/A1+(ZA), with the Outlook revised to Stable. At the same time, the international scale long-term issuer rating has been affirmed at BB, Negative Outlook maintained. GCR has also assigned a short-term international scale rating of B.
The ratings of Investec Bank Limited (“IBL”, “the bank”) are based on the credit profile of the consolidated South African group, Investec Limited (“the group”). IBL is controlled by Investec Limited, a holding company that houses the Southern African operations of the broader Investec group. Investec Limited’s core focus is on Specialist Banking and Wealth & Investment, primarily in the South African market, with smaller operations in Mauritius. We consider IBL to be the core operating entity within the group, representing 92.7% of the total asset base as at FY21. Accordingly, the ratings of IBL are equalised to the group Anchor Credit Evaluator.
IBL’s ratings balance excellent asset quality, improving capitalisation and strong liquidity against its comparatively smaller size relative to the top four banks that dominate the South African banking landscape and higher reliance on wholesale type funding.
Asset quality continues to outshine peers. Credit losses and non-performing loans (“NPLs”) remain well below the industry average, highlighting the benefits of the focussed business model and a highly resilient client base. Despite the lingering impact of the pandemic, GCR calculated credit losses (based on a 2 year average of gross loans) have remained very strong at 0.21% in FY21, aided by substantial recoveries during the year. GCR calculated NPLs rose to 2.6% from 1.5%, but still compared favourably to the South African banking sector average of around 4.7%. While collateral is viewed to be adequate, the exposure to more vulnerable sectors (such as aviation) could result in a creep-up of asset quality pressure over the next two years, exposing the group to potential revaluation risk in the future. As such, we think credit losses could normalise at 0.3% by 2023 while NPLs remain above the historical average at 2.6%. Nonetheless, excellent asset quality is likely to remain the core strength of the group and we believe this is the cornerstone of the group’s ability to report adequate profitability even in a highly stressed scenario like 2020.
The group’s capital and leverage is in line with peers, benefiting from the regulatory approval allowing the bank to transition towards the Advanced Internal Ratings Based (“AIRB”) capital approach (for the corporate and SME models) and slightly negative loan growth in FY21. This resulted in a notable reduction in some core risk weighted charges and uplifted the GCR total capital ratio to 13.4% at FY21 (FY20: 11.4%). We think further benefits to capital may accrue once other aspects of the AIRB are approved and implemented, and this is likely to cement a much more solid capital and leverage assessment in the next 12-18 months, which is expected to compare favourably to peers (GCR total capital expectation of around 13.5%-14%). This will be aided by recovering profitability on the back of contained credit losses, normalisation of the endowment effect on net interest income (after the unprecedented level of interest rate cuts in 2020), and uptick in fee income on the back of a sustained increase in transactional volume that began in the second half of 2020.
The neutral funding and liquidity balances the group’s higher reliance on financial corporate funding (which are viewed by GCR to be more sensitive sources of funding in South Africa) with stronger liquidity buffers. Financial corporates (including banks) represented above 50% of total deposits, with the remainder being spilt between retail, non-financial corporates, and public sector depositors. While this is a common feature in the South African banking sector, the group’s funding mix is slanted towards more sensitive funding sources when compared to peers. From a regulatory point of view, the net stable funding ratio (“NSFR”) was comparable with some peers at 113% and the group is also beginning to realise some benefits of the lower interest rates, with cost of funding reducing to 4% in FY21, from 6% in FY20.
Since the onset of the pandemic, and after the initial fears of a liquidity crunch, systemwide liquidity held up quite well. The group reported a Liquidity Coverage Ratio (“LCR”) of 158% at December 2020 (164% at March 2021), which was above the market average of 142%. Other key liquidity metrics also continue to track at strong levels with liquid assets comprising 38% of total deposits (including banks) at FY21. There may be some liquidity dilution over the next few years as uncertainty around the pandemic subsides, appetite for higher risk investments increase, and loan book growth ramps up, but we expect liquidity to remain sound and continue to offset the more sensitive nature of the funding profile.
Competitive positioning is a slight ratings positive. IBL is a top tier bank in the South African banking sector (7.6% market share of total assets), but there is a considerable gap to the big four banks that dominate the market. However, IBL has a clearly defined focus to bank high net worth clients and accrues the benefits of this more resilient client base through notably better asset quality. In addition to this, the wealth and investment business is capital light and compliments the banks product offerings, providing the group with steady fee income (through sizeable funds under management of around R340bn) supportive of revenue stability. There is some geographic diversification through the Mauritius banking subsidiary, although not material when compared to peers.
The Stable outlook on the national scale is based on the group’s highly resilient client base that is expected to support strong asset quality through the cycle. We also believe that the full transition to the AIRB approach, coupled with stabilised earnings could sustain an elevated GCR capital ratio of 13.5% over the next two years, which would provide adequate loss absorption capacity for any unforeseen earnings shocks. On the other hand, the Negative outlook on the international scale factors in the uncertainty of the operating environment, which could negatively impact the country and sector risk scores causing a downgrade to the ratings.
Upward movement on the international scale ratings are limited, given the Negative outlook and broadly negative sentiment in the operating environment score, but over the medium term, a material improvement in the South African economy and continued resilience of the banking sector could see the outlook revert to Stable. The national scale ratings could be upgraded should the GCR capital ratio be sustained above 14% over the medium term and remains elevated relative to peers, earnings remain broadly comparable to domestic banking peers, or if there is a shift towards more retail based funding while maintaining strong liquidity and excellent asset quality. The international scale ratings could be downgraded if the operating environment score is lowered, while downward rating pressure on the national scale ratings could emanate through a material weakening in asset quality and earnings causing the GCR capital ratio to fall below 10% on a sustained basis.
|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|
Investec Bank Limited
|Rating class||Review||Rating scale||Rating class||Outlook||Date|
|Long Term Issuer||Initial||National||AA-(ZA)||Stable||September 2000|
|Short Term Issuer||Initial||National||A1+(ZA)||N/a||September 2000|
Risk Score Summary
|Rating Components & Factors||Risk scores|
|Country risk score||7.00|
|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 been disclosed to the rated entity. The ratings 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 Investec Bank Limited and other reliable third parties to accord the credit ratings included:
- Audited financial results as at 31 March 2021 (plus four years of comparative numbers);
- Other public and private information; and
- Industry comparative data.