Announcements

GCR affirms Investec Bank Limited’s rating of AA-(ZA); Outlook Stable.

Johannesburg, 29 Oct 2014 – Global Credit Ratings has affirmed the national scale ratings assigned to Investec 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 rating assigned to Investec Bank Limited of BBB; with the outlook accorded as Negative.

SUMMARY RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit rating(s) to Investec Bank Limited (“IBL” or “the bank”) based on the following key criteria:

The accorded ratings reflect IBL’s established franchise value (taking into account that its niche focus translates into a relatively captive market/client base), diversified income streams, improving asset quality/performance and strong capital cushion. Nevertheless, these are partly offset by an uncertain local business outlook and the confidence-sensitive nature of IBL’s funding.

IBL is the fifth largest bank in South Africa, accounting for 7.4% of both total banking industry assets and deposits as at 31 March 2014. Furthermore, the bank is a major operating subsidiary of the Investec Group, with consolidated equity capital of £4bn and assets amounting to £47.1bn at FYE14.

IBL is well capitalised for current risk levels, with a total risk weighted capital adequacy ratio of 15.3% at FYE14 (statutory minimum 9.8%), calculated in line with Basel III capital requirements, as currently applicable in South Africa.

Gross default loans decreased 12.2% to R3.5bn at FYE14 (partly through settlements/write-offs). Accordingly, the bank reported a decline in its gross default loans/gross loans ratio to 2.3% from 2.9% at FYE13. Investec’s sound asset quality reflects the bank’s successful execution and delivery of its multi-year restructuring and de-risking plan, including the material reduction of the credit risk within its legacy default portfolio (largely relating to lending collateralised by property). Net default loans amounted to a lower 6.3% of capital (FYE13: 7.4%). Further, cognisance is taken of the large amount of collateral held against arrears.

Reversing the downward trend of the previous two years, earnings before tax grew by 16.1% to R2.5bn in F14. The performance was supported by growth in non-interest income and lower loan impairment charges. Overall, the bank’s ROaE increased slightly to 8.8% (F13: 8.5%), while the ROaA remained flat at 0.7%. IBL’s liquidity risk profile is tightly controlled, with liquidity maintained well within internal and regulatory targets.

A further improvement in franchise and business diversity without a substantial negative impact on risk appetite and asset quality would have a positive impact on IBL’s ratings. A significant deterioration in IBL’s asset quality, long term earnings, funding and liquidity profile as well as in capital ratios (on the back of an uncertain economic environment) could lead to negative rating action. This, combined with sovereign linked risk, makes an upgrade unlikely.

NATIONAL SCALE RATINGS HISTORY INTERNATIONAL SCALE RATING HISTORY
Initial rating (Sep/2000) Initial rating (Oct/2013)
Long term: AA-(ZA); Short term: A1+(ZA) Long term: BBB
Outlook: Stable Outlook: Stable
Last rating (July/2014) Last rating (July/2014)
Long term: AA-(ZA); Short term: A1+(ZA) Long term: BBB
Outlook: Stable Outlook: Negative

ANALYTICAL CONTACTS

Primary Analyst
Jennifer Mwerenga
Senior Analyst
(011) 784-1771
jennifer@globalratings.net

Committee Chairperson
Omega Collocott
Head: Financial Institution Ratings
(011) 784-1771
omegac@globalratings.net

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Banking Criteria (updated April 2014)
South Africa Bank Bulletin (2013)
Previous Rating Reports (up to 2013)

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; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument, and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.

The ratings above were solicited by, or on behalf of, Investec Bank Limited, and therefore, GCR has been compensated for the provision of the ratings.

Investec Bank Limited participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.

The credit rating/s has been disclosed to Investec Bank Limited with no contestation of the rating.

The information received from Investec Bank Limited and other reliable third parties to accord the credit rating included the 31 March 2014 audited annual financial statements (plus four years of comparative numbers), latest internal and/or external management reports, corporate governance and enterprise risk framework, reserving methodologies, capital management policy, industry comparative data and regulatory framework, and a breakdown of facilities available and related counterparties.

GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S FINANCIAL INSTITUTIONS GLOSSARY

Accounting

Recording and reporting of financial transactions, including the origination of the transaction, its recognition, processing, and summarisation in the financial statements.

Asset Quality

The ability of a bank’s assets, especially its loans, to continue to perform according to its terms and generate net interest income for the bank.

Basel

Basel Committee on Banking Supervision housed at the Bank for International Settlements.

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.

Collateral

Asset provided to a creditor as security for a loan.

Corporate Governance

The manner in which an entity is governed and decisions are undertaken.

Credit Rating Agency

A party that provides an opinion on the credit quality of assets, debt securities and companies.

Credit risk

Risk that a party to a contractual agreement or transaction will be unable to meet their obligations or will default on commitments. Credit risk can be associated with almost any transaction or instrument such as swaps, repos, CDs, foreign exchange transactions, etc. Specific types of credit risk include sovereign risk, country risk, legal or force.

Default

Failure to make loan payments on a timely basis or to comply with other terms/requirements as stipulated in the loan agreement.

Financial Institution

An entity that focuses on dealing with financial transactions, such as investments, loans and deposits.

Financial Statements

Presentation of financial data including balance sheets, income statements and statements of cash flow, or any supporting statement that is intended to communicate an entity’s financial position at a point in time and its results of operations for a period then ended.

Franchise

Business or banking franchise; a bank’s business.

Impairment

An amount set aside for expected losses to be incurred by a creditor.

Income Statement

Summary of the effect of revenues and expenses over a period of time.

Liquidity Risk

Liquidity is the ability to fund increases in assets and meet obligations as they become due, without incurring unacceptable losses.

Risk Appetite

The quantum of risk the group is willing to accept in pursuit of its business strategy. Risk appetite is expressed quantitatively as risk measures such as economic capital and risk limits, and qualitatively in terms of policies and controls.

Sovereign Risk

The risk of default by the government of the country on its obligations.

Write-off

The total reduction in the value of an asset.

GCR affirms Investec Bank Limited’s rating of AA-(ZA); Outlook Stable.

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