Johannesburg, 31 October 2017 – 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 long-term local currency rating assigned to Investec Bank Limited of BB+; with the outlook accorded as Negative.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Investec Bank Limited (“IBL”, “the bank”) based on the following key criteria:
The ratings of IBL reflect its diversified business model, growing client base, and significant share in selected, resilient market segments. Stable performance metrics, driven by a recurring earnings base, have accompanied adequate capitalisation and a solid funding/liquidity structure, which is in compliance with full Basel III implementation levels. However, South Africa’s challenging operating environment creates asset quality uncertainty, despite IBL’s select clientele and collateralised loan book.
At FY17, IBL contributed around 26% and 53% of Investec Group’s total operating income of GBP2.2bn and assets of GBP45.8bn respectively. IBL is the fifth largest South African bank, accounting for c.8% of banking industry assets at 30 June 2017, and is considered to be systemically important, together with South Africa’s four largest banks (which together command c.82% of South African bank assets).
IBL’s funding structure is underpinned by stable private client deposits and long-term wholesale funding. An 8.5% increase in customer deposits in FY17 further supported funding-based regulatory compliance metrics. Liquidity and balance sheet risks are tightly managed.
IBL is well capitalised. Total regulatory capital grew by 11.6% to R48.1bn at FY17, on the back of retained earnings growth of 13.4% and an increase in Tier 2 capital (from R10.7bn to R13.5bn). As a result, the bank’s risk-weighted capital adequacy ratios (“CAR”) improved to 11.1% (Tier 1) and 15.4% (total) at FY17 from 11.0% and 14.6% at FY16, respectively. The bank’s CARs remain well above regulatory minima and within management targets, despite being calculated on the more conservative ‘standardised’ approach.
Compared to core loans and advances growth of 8.6%, impaired loans increased by 12.6% to R3.6bn (FY16: R3.2bn) at FY17 due to financial stress experienced by some clients. Ultimately, IBL’s gross default ratio remained stable at 1.5% at FY17, a reflection of the bank’s strong credit practices and lending linked to client cash flow and collateral. Provision coverage of defaults improved to 33.5% (FY16: 28.6%), but remained low compared to peers. GCR notes, however, that provisions plus collateral fully cover arrears.
The bank posted a decrease in after-tax profits of 7.1% to R3.2bn (FY16: R3.5bn) in FY17, impacted by a change in accounting treatment from fair value to equity accounting for assets transferred to the IEP Group (previously Investec Equity Partners). Earnings were also moderated by higher impairment and operating costs, partially offset by net interest income growth of 10.5% and a rise in net fee and commission income.
The ratings fully incorporate the bank’s systemically important status, meaningful market positions in key activities, conservative financial profile, solid regulatory compliance metrics, and through-the-cycle resilience. Consequently, there is limited upside rating potential. Significant deterioration in asset or earnings quality, profitability, funding and liquidity profile, and/or capitalisation, could prompt negative rating action. Furthermore, the bank’s international scale rating will be sensitive to changes in the sovereign rating of South Africa.
|NATIONAL SCALE RATINGS HISTORY||INTERNATIONAL SCALE RATING 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 (May 2017)||Last rating (May 2017)|
|Long-term: AA(ZA); Short-term: A1+(ZA)||Long-term: BB+|
|Outlook: Stable||Outlook: Negative|
|Kurt Boere||Jennifer Mwerenga|
|Senior Credit Analyst||Senior Credit Analyst|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2017
South Africa Bank Statistical Bulletin (June 2017)
IBL rating reports (2000-16)
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 rating.
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 2017 (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, Investec Bank Limited, and 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 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 (ie, 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 I||Basel Committee regulations, which set out the minimum capital requirements of financial institutions with the goal of minimising credit risk.|
|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.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|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.|
|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.|
|Diversification||Spreading risk by constructing a portfolio that contains different investments, 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.|
|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.|
|International Scale Rating LC||International local currency (International LC) ratings measure the likelihood of repayment in the currency of the jurisdiction in which the issuer is domiciled. Therefore, the rating does not take into account the possibility that it will not be able to convert local currency into foreign currency or make transfers between sovereign jurisdictions.|
|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.|
|Long-Term||Not current; ordinarily more than one year.|
|Long-Term Rating||Reflects an issuer’s ability to meet its financial obligations over the following three to five year period, including interest payments and debt redemptions. This encompasses an evaluation of the organisation’s current financial position, and how the position may change in the future with regard to meeting longer term financial obligations.|
|National Scale Rating||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.|
|Performing Loan||A loan is said to be performing if the borrower is paying the interest on it on a timely basis.|
|Provision||The amount set aside or deducted from operating income to cover expected or identified loan losses.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|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.|
|Settlement||Full repayment of an obligation.|
|Short-Term||Current; ordinarily less than one year.|
|Short-Term Rating||An opinion of an issuer’s ability to meet all financial obligations over the upcoming 12 month period, including interest payments and debt redemptions.|
For a detailed glossary of terms please click here
GCR affirms Investec Bank Limited’s rating of AA(ZA); Outlook Stable.