Johannesburg, 27 October 2015 — Global Credit Ratings has today 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 has accorded the above credit ratings to Investec Bank Limited (“IBL”, “the bank”) based on the following key criteria:
The ratings accorded to IBL reflect its established and streamlined business model, niche client base and markets, diversified and increasingly recurring earnings, improving asset quality/performance, and comfortable capital/liquidity levels. However, note is taken of South Africa’s deteriorating consumer and corporate environments, to which IBL is exposed despite its select clientele and highly collateralised loan book.
IBL is a major operating subsidiary of the Investec Group (“Investec”, “the group”), which had consolidated equity capital of GBP3.5bn and assets of GBP44.4bn at FYE15. IBL is the fifth largest South African bank, accounting for 7.5% of banking industry assets/deposits at 30 June 2015. This compares to South Africa’s four largest banks, which each command a market share in the 16-25% range.
The bank’s 17.2% loan growth, funded primarily by retail deposits (in line with a strategy to attract stable funding), has driven performance while supporting fulfilment of future regulatory compliance metrics.
IBL is well capitalised for current risk levels. The bank’s risk-weighted capital adequacy ratios (“CAR”) increased in F15, with Tier 1 and total CAR of 11.4% and 15.4% at FYE15 respectively (vs. 10.8% and 15.3% at FYE14 respectively), despite some Tier 1 and 2 instruments being phased-out under the Basel III capital requirements, as currently applicable in South Africa. Liquidity/balance sheet risk profiles were strictly controlled, with key risk categories maintained well within internal and regulatory targets.
Opportunities in selected markets, strong credit practices and controlled loan growth have reduced IBL’s FYE15 gross default ratio to 2.1% (FYE14: 2.3%). Core impaired loans rose slightly to R3.7bn at FYE15, driven by higher non-performing loans (“NPLs”) in some corporate books. The bulk of NPLs (74.9%) related to Private Banking, concentrated in a few property-collateralised exposures. Provisions plus collateral fully cover arrears.
Pre-tax earnings grew by a high 49.0% in F15, supported by strong loan and net interest income growth, stable margins on funded income, significant gains in investment portfolios, and moderating impairment charges. The bank’s ROaA and ROaE increased to 1.0% (F14: 0.7%) and 11.5% (F14: 8.8%) in F15, respectively.
Evidence of an enhanced support structure/environment, and meaningful market positions in key activities, could have a positive impact on the rating. The ratings reflect the bank’s through-the-cycle resilience and proactive risk management, solid capital levels/profitability and diversified funding. A significant deterioration in IBL’s asset quality, long term earnings, funding and liquidity profile, as well as in capital ratios, could lead to negative rating action.
|NATIONAL SCALE RATINGS HISTORY||INTERNATIONAL SCALE RATINGS HISTORY|
|Initial rating (September 2000)||Initial rating (October 2013)|
|Long term: AA-(ZA); Short term: A1+(ZA)||Long term: BBB|
|Outlook: Stable||Outlook: Stable|
|Last rating (October 2014)||Last rating (October 2014)|
|Long term: AA-(ZA); Short term: A1+(ZA)||Long term: BBB|
|Outlook: Stable||Outlook: Negative|
|Primary Analyst||Committee Chairperson|
|Omega Collocott||Jennifer Mwerenga|
|Sector Head: Financial Institution Ratings||Senior Credit Analyst|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Banks and Other Financial Institutions, March 2015
South Africa Bank Bulletin (2014)
South Africa Bank Statistical Bulletin (June 2015)
IBL rating reports (2000-14)
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.
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 ratings have been disclosed to Investec Bank Limited with no contestation of the ratings.
The information received from Investec Bank Limited and other reliable third parties to accord the credit rating(s) included:
- Audited financial results of the bank at 31 March 2015 (plus four years of comparative numbers);
- Corporate governance and enterprise risk framework;
- Reserving methodologies and capital management policy;
- Industry comparative data and regulatory framework; and
- A breakdown of facilities available and related counterparties.
The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S FINANCIAL INSTITUTIONS GLOSSARY
|Arrears||An overdue debt, liability or obligation. An account is said to be ‘in arrears’ if one or more payments have been missed in transactions where regular payments are contractually required.|
|Asset||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|Asset Quality||Asset quality refers primarily to the credit quality of a bank’s earning assets, the bulk of which comprises its loan portfolio, but will also include its investment portfolio as well as off balance sheet items. Quality in this context means the degree to which the loans that the bank has extended are performing (i.e. being paid back in accordance with their terms) and the likelihood that they will continue to perform.|
|Balance Sheet||Also known as a 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.|
|Basel||Basel Committee on Banking Supervision housed at the Bank for International Settlements.|
|Basel III||A comprehensive set of reform measures designed to improve the regulation, supervision and risk management within the banking sector. Largely in response to the credit crisis, banks are required to maintain prescribed leverage ratios and meet certain capital requirements.|
|Capital||The sum of money that is invested to generate proceeds.|
|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.|
|Credit Rating||An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.|
|Credit Rating Agency||An entity that provides credit rating services.|
|Credit Risk||The possibility that a bond issuer or any other borrowers (including debtors/creditors) will default and fail to pay the principal and/or interest when due.|
|Creditworthiness||An assessment of a debtor’s ability to meet debt 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.|
|Default||Failure to meet the payment obligation of either interest or principal on a debt or bond. Technically, a borrower does not default, the initiative comes from the lender who declares that the borrower is in default.|
|Equity||Equity (or shareholders’ funds) is the holding or stake that shareholders have in a company. Equity capital is raised by the issue of new shares or by retaining profit.|
|Exchange||A standardised marketplace in which different assets are traded.|
|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.|
|Financial Institution||An entity that focuses on dealing with financial transactions, such as investments, loans and deposits.|
|Fraud||The unlawful and intentional making of a misrepresentation which causes actual and or potential prejudice to another.|
|Impairment||Reduction in the value of an asset because the asset is no longer expected to generate the same benefits, as determined by the company through periodic assessments.|
|Insolvent||When an entity’s liabilities exceed its assets.|
|Interest Rate||The charge or the return on an asset or debt expressed as a percentage of the price or size of the asset or debt. It is usually expressed on an annual basis.|
|International Scale Rating||ISRs relate to either foreign currency or local currency commitments, assessing the capacity of an issuer to meet these commitments using a globally applicable (and therefore internationally comparable) scale.|
|Lease||Conveyance of land, buildings, equipment or other assets from one person (lessor) to another (lessee) for a specific period of time for monetary or other consideration, usually in the form of rent.|
|Leverage||With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.|
|Liabilities||All financial claims, debts or potential losses incurred by an individual or an organisation.|
|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.|
|Liquidity Risk||The risk that a company may not be able to meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets. Regarding securities, the risk that a financial instrument cannot be traded at its market price due to the size, structure or efficiency of the market.|
|Long term||Not current; ordinarily more than one year.|
|Margin||The rate taken by the lender over the cost of funds, which effectively represents the entity’s profit and remuneration for taking the risk of the loan; also known as spread.|
|National Scale Rating||The national scale provides a relative measure of creditworthiness for rated entities only within the country concerned. Under this rating scale, a ‘AAA’ long term national scale rating will typically be assigned to the lowest relative risk within that country, which in most cases will be the sovereign state.|
|Non-Performing Loan||When a borrower is overdue, typically 90+ days in arrears or as defined by the lender, or in the transaction documents.|
|Performing Loan||A loan is said to be performing if the borrower is paying the interest on it on a timely basis.|
|Portfolio||A collection of investments held by an individual investor or financial institution. They may include stocks, bonds, futures contracts, options, real estate investments or any item that the holder believes will retain its value.|
|Principal||The total amount borrowed or lent, e.g. the face value of a bond, excluding interest.|
|Provision||The amount set aside or deducted from operating income to cover expected or identified loan losses.|
|REPO||In a REPO one party sells assets or securities to another and agrees to repurchase them later at a set price on a specified date.|
|Risk Management||Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy.|
|Securities||Various instruments used in the capital market to raise funds.|
|Security||An asset deposited or pledged as a guarantee of the fulfilment of an undertaking or the repayment of a loan, to be forfeited in case of default.|
|Shareholder||An individual, entity or financial institution that holds shares or stock in an organisation or company.|
|Short Term||Current; ordinarily less than one year.|