Announcements

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

Johannesburg, 26 October 2016 — 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.

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 is the key banking subsidiary of Investec plc, which controls Investec Group’s (“Investec”) non-Southern African operations.

IBP’s accorded ratings reflect its established Wealth and Investment offering, more streamlined Specialist Banking business, targeted and client-focussed strategy, diversified and predominantly recurring earnings base, stable asset quality/performance, and comfortable capital/liquidity levels. A weaker local economic landscape and Brexit-related uncertainty given its United Kingdom (“UK”) domicile were also considered.

At FYE16, IBP contributed around 44.3% and 46.4% of Investec’s total operating income of GBP1.9bn and assets of GBP39.5bn respectively. IBP is the 17th largest UK bank by Tier 1 capital, accounting for 0.4% of banking industry assets at 31 March 2016, and is not considered to be systemically important.

Loan growth of 10.6% in F16, funded primarily by a 4.3% increase in customer deposits (in line with stable funding attraction strategies), has driven revenue growth and supported funding-based regulatory compliance metrics comfortably in excess of full Basel III implementation levels. Liquidity and balance sheet risks are tightly managed.

IBP is comfortably capitalised. The risk-weighted capital adequacy ratios (“CARs”) moderated slightly in F16, to 11.9% (Common Equity Tier 1) and 17.0% (total) vs. 12.1% and 17.5% at FYE15, respectively. Risk-asset growth drove the decline in CARs, which remained well above regulatory minima and management targets.

IBP’s strong credit practices and lending linked to client cash flow and collateral reduced the gross default ratio to 4.0% at FYE16 (FYE15: 5.5%). Impaired loans declined to GBP314m (FYE15: GBP400m) due to settlements, write-offs, and lower non-performing loans in new origination. The bank also managed to reduce its legacy portfolio from GBP695m to GBP583m in F16. While provision coverage of defaults declined to 45.6% (FYE15: 47.1%), provisions plus collateral fully cover arrears. While most metrics highlighted asset quality improvement, operating environment challenges make a reversal of this trend in F17 a possibility in GCR’s opinion.

Given the sale of non-core businesses in F15, a statutory year on year comparison of financial performance is deemed inappropriate. On an ‘ongoing business’ basis, profitability and efficiency are stable. Pre-tax earnings grew by 3.1% to GBP218m in F16, supported by loan growth and lower funding costs, but impacted by cost growth of 4.3% and a GBP2.4m increase in ‘ongoing’ impairments.

IBP’s strong ratings reflect its through-the-cycle resilience and proactive risk management. Solid capital levels/profitability and diversified funding support the bank’s ratings. The uncertain UK operating environment limits an upward movement of the bank’s ratings at this stage. Deterioration in the bank’s asset quality, long term earnings, funding/liquidity profile, or capital ratios, could lead to negative rating action.

INTERNATIONAL SCALE RATINGS HISTORY    
     
Initial rating (October 2000)    
Long term: A-; Short term: A2    
Outlook: Stable    
     
Last rating (October 2015)    
Long term: BBB+; Short term: A2    
Outlook: Stable    

ANALYTICAL CONTACTS

Primary Analyst   Committee Chairperson
Kurt Boere   Omega Collocott
Credit Analyst   Sector Head: Financial Institution Ratings
(011) 784-1771   (011) 784-1771
boere@globalratings.net   omegac@globalratings.net

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Global Criteria for Rating Banks and Other Financial Institutions, updated March 2016

IBP rating reports (2000-15)

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 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 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 2016 (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.
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 utilised in this announcement please click here

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