Announcements

GCR affirms Investec Bank plc’s rating of BBB+; Outlook Stable.

Johannesburg, 4 Nov 2014 – 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 Stable. The rating(s) are valid until 10/2015.

SUMMARY RATING RATIONALE

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

IBP’s ratings are supported by a well-established franchise (considering that its niche focus translates into a relatively captive market/client base), strong and risk appropriate capital ratios, and adequate loan loss reserves. These factors are, however, partially offset by the uncertainties around a fundamental global economic recovery.

A common equity Tier I ratio and capital adequacy ratio (“CAR”) of 10.7% and 15.7% were reported at FYE14 (calculated in line with Basel III capital requirements as currently applicable in the United Kingdom), well above the regulatory minima of 7% and 9.8% respectively. The CAR was within IBP’s internal target range of 14% to 17%, providing the bank with a substantial buffer (above regulatory minimum requirements) to absorb losses and protect its viability.

Asset quality indicators improved during F14, on the back of secondary loan sales, write-offs, recoveries on legacy loans (largely the property book) and the underwriting of better quality assets. Gross defaults/impaired loans decreased 9.1% to 5.4% (F13: 6.0%) of gross core loans and advances. Total provisions covered 42.3% of arrears (F13: 38.4%), with the remaining exposure more than fully covered by the fair value of collateral held. Specific provisions are raised after recognising the net realisable value of collateral held. The net default ratio and net defaults/core Tier I capital ratio were 3.2% and 19.5% at FYE14 respectively, pre-collateral.

Pre-tax profit grew by 68.9% (F13: 24.6%) to £78.7m, driven by an improved net interest margin, significant reduction in loan impairment charges, and growth in non-funded income and exceptional items. Overall, IBP’s ROaE increased to 4.1% in F14, from 2.6% in F13, while the ROaA increased to 0.4% from 0.2% over the same period.

IBP’s balance sheet is highly liquid, with liquidity ratios maintained well above statutory requirements. Cash and near cash balances amounted to 38.3% (FYE13: 40.0%) of customer deposits at FYE14.

IBP’s ratings are very robust and an upward movement is highly unlikely in the medium term. The ratings reflect the bank’s resilience through the economic cycle. However, risk appropriate capital levels and profitability trends need to be maintained to entrench the rating. The ratings will be sensitive to any setback in the economic recovery (escalation in unemployment rates and/or reductions in property prices), a weakening in asset quality indicators, sustained pressure on profitability stemming from a further rise in loan loss provisions, or markedly lower liquidity or capitalisation.

INTERNATIONAL SCALE RATINGS HISTORY

Initial rating (Oct/2000)
Long term: A-; Short term: A2
Outlook: Stable

Last rating (Feb/2014)
Long term: BBB+; Short term: A2
Outlook: Stable

ANALYTICAL CONTACTS

Primary Analyst
Jennifer Mwerenga
Senior Credit 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)
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; and c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

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

Investec Bank plc 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 plc with no contestation of the rating.

The information received from Investec Bank plc 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

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.

Balance Sheet

Basic financial statements, usually accompanied by appropriate disclosures that describe the basis of accounting used in its preparation and presentation of a specified date the entity’s assets, liabilities and owners’ equity. Also known as a statement of financial position.

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.

Customer Deposits

Deposits other than interbank deposits.

Default

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

Exceptional Items

Events and transactions distinguished by their unusual nature and by the infrequency of their occurrence.

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.

Net Interest Margin

Net interest margin is the net interest income divided by average interest earning assets.

Tier I Capital

Primary capital consists of issued ordinary share capital, hybrid debt capital, perpetual preference share capital, retained earnings and reserves. This amount is then reduced by the portion of capital that is allocated to trading activities and other regulatory deductions.

Retained Earnings

The accumulation of an entity’s profits less any dividends paid out.

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.

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