Johannesburg, 30 November 2018 – 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 Stable.
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 on the bank reflect a modest market position but strong defendable niche amongst high net worth individuals (“HNWI”), adequate capitalisation, strong risk position and sound liquidity balancing a concentrated funding profile.
The bank is the 5th largest bank by assets with a relatively modest confidence sensitive client base. Its competitive position is limited by lack of geographic diversification, however, its franchise benefits from the wider Investec Group. The bank is not a mass market institution, instead, IBL provides high touch, customer oriented and strong digital services to HNWI and specialist corporate banking. Ongoing digitisation, business banking, and diversification into life insurance is expected to diversify revenue and boost performance. We do not expect a significant improvement in market position due the fact that the target market will remain niched.
IBL has the strongest risk position of the big four banks, reflecting its franchise amongst the relatively richer retail customer base (lowering credit risk), minimal market risk and low operational risks. Credit losses were at the lower end (0.3%) compared to a peer group average of 0.8%. The net default ratio decreased to 0.6% at FY18 (FY17: 1.0%).
The bank is adequately capitalised. At FY18, the banks’ core equity tier 1 (“CET1”) ratio was 10.9% compared to the top four banks average of 12.8%. IFRS 9 implementation resulted in a decrease in IBL’s CET 1 ratio by 17bps, remaining above the group’s 10% target and with good headroom over minimum regulatory requirements.
IBL’s profitability is sound however, it compares modestly to domestic market peers. At FY18, the bank returned 12% of equity in comparison to the top tier market average of over 18%. In part, this reflects the leverage differences noted above, but the bank also operates with thinner margins and with lower non-interest income coverage of operating expenses.
In our opinion, the funding profile of the bank broadly compares to the South African top tier banks, with medium term high funding concentrations reflecting the structural dominance of financial corporates in the contractual savings market and low domestic discretionary savings. The cost of funds is at the higher end (7.01%) due to active client deposit management. Positively, the bank holds strong levels of liquidity versus peers. At FY18, the bank recorded a liquidity coverage ratio of 133%, against the current regulatory minimum of 90%.
Material deterioration in asset quality, profitability and capital, could lead to negative rating action. The international scale rating is sensitive to the operating environment. Upward rating action may stem from an unanticipated significant improvement in competitive position.
|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 (October 2017)||Last rating (June 2018)|
|Long-term: AA(ZA); Short-term: A1+(ZA)||Long-term: BB+|
|Outlook: Stable||Outlook: Stable|
|Primary Analyst||Committee Chairperson|
|Vimbai Muhwati||Matthew Pirnie|
|Credit Analyst||Sector Head: Financial Institutions Ratings|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2017
IBL rating reports (2000-17)
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; and c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
Investec Bank Limited participated in the rating process via face-to-face management meetings 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.
The information received from Investec Bank Limited and other reliable third parties to accord the credit ratings included:
• Audited financial results of the bank at 31 March 2018 (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.