Johannesburg, 31 October 2017 — Global Credit Ratings has affirmed the international scale ratings assigned to Investec Bank plc of BBB+ and A2 in the long term and short term respectively; with the outlook accorded as Positive.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Investec Bank plc (“IBP”, “the bank”) based on the following key criteria:
IBP operates as a specialist bank and wealth manager within Investec plc, which oversees Investec Group’s (“Investec”) non-Southern African operations.
The Positive rating outlook reflects the bank’s improved financial profile over the review period, and GCR’s expectation for a continuation of this improving trend despite operating environment pressures. IBP’s legacy assets have reduced from GBP2.6bn at FY13 to GBP476m at FY17, and the concentration of its loan book towards property lending has decreased from 52% of net core loans at FY10 to 22% at FY17. Furthermore, the bank’s stability of earnings has been enhanced through its increased focus on capital-light businesses. At the same time, the bank’s capital and liquidity metrics have remained sound. IBP’s commitment to risk management enhancement and rigour support the high likelihood of comfortable capital and liquidity buffers being maintained, enabling IBP to manage an uncertain operating environment in the United Kingdom (“UK”).
At FY17, IBP contributed 43% and 40% of Investec’s total operating income (“TOI”) of GBP2.3bn and assets of GBP45.8bn respectively. IBP is the 20th largest UK bank by Tier 1 capital, accounting for approximately 0.3% of banking industry assets at 31 May 2017, and is not considered to be systemically important.
IBP is well capitalised. Total regulatory capital grew by 6.1% to GBP2.1bn at FY17, on the back of retained earnings growth of 21.3%. The bank’s risk-weighted total capital adequacy ratio (“CAR”) decreased to 16.6% at FY17 (FY16: 17.0%) mainly due to risk-asset growth of 8.3%. Nevertheless, the bank’s CAR remains well above the regulatory minimum and within management’s target range of 14-17%.
IBP’s strong credit practices and lending linked to client cash flow and collateral reduced the gross default ratio to 3.0% at FY17 (FY16: 4.0%). Impaired loans (which largely relate to the legacy portfolio) declined to GBP260m (FY16: GBP314m) due to settlements, write-offs, and low non-performing loans in new origination. Provision coverage of defaults increased to 48.7% (FY16: 45.6%). Provisions plus collateral fully cover defaults.
The bank posted an increase in after-tax profits of 24.3% to GBP118m (FY16: GBP95bn) in FY17, supported by TOI growth of 14.4% and lower impairment costs, partially offset by a 18.5% rise in operating costs due to planned investments.
A continued improvement in the bank’s financial profile, including a further rundown of its legacy book, which is likely to reduce asset risk, could lead to a ratings upgrade. Downward rating pressure is unlikely given IBP’s Positive rating outlook. However, material deterioration in the bank’s asset quality, profitability, funding/liquidity profile, or capitalisation could lead to negative rating action.
|INTERNATIONAL SCALE RATINGS HISTORY|
|Initial rating (October 2000)|
|Long term: A-; Short term: A2|
|Last rating (October 2016)|
|Long term: BBB+; Short term: A2|
|Primary Analyst||Committee Chairperson|
|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
IBP 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; and c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
Investec Bank plc participated in the rating process via video conferences, 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 plc with no contestation of the rating.
The information received from Investec Bank plc 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 plc, 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.|
|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