Johannesburg, 19 December 2018 — 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:
The ratings reflect the bank’s high wealth and sophisticated operating environment, relatively small market share but defendable niche amongst high net worth individuals (“HNWI”), good liquidity, satisfactory asset quality and adequate capitalisation. The stable outlook factors improvements in the financial profile, constrained by domestic economic uncertainties, best typified by Brexit. Cognisance is taken these uncertainties may affect all United Kingdom (“UK”) based banks and are not IBP specific.
Though not directly comparable, the bank has a small market share and relatively few clients in comparison to the established UK high street banks. However, IBP’s Wealth and Investment business is one the UK’s leading private client wealth manager by funds under management. Wealth and Investment contributed 50.8% of the bank’s operating profit before tax at FY18, providing some revenue stability and franchise strength due to its leading market position. GCR takes note of additional ongoing diversification efforts, i.e. the further development of the private banking proposition, however most customers are multi banked enforcing some barriers to entry. The successful build out of private banking will boost the bank’s performance and deposit diversification. While uncertainty exists regarding Brexit (potentially disrupting the financial sector), management is taking appropriate measures to protect the bank in the event of a significant negative impact by amongst other measures, keeping surplus liquidity.
The bank has significantly run down its poorly performing legacy loan book (largely in commercial real estate) to 2.7% of net core loans at 1 April 2018 (FY17: 5.5%) thereby improving the overall quality of the book. The reserve coverage of the legacy loan book, at the same date was 40%, following significant provisioning to run down the legacy book in 2017/8 and from IFRS 9 implementation. On-going gross defaults constituted 1.7% of on-going gross core loans at the same date. We expect the cost of risk to run at normalised levels (i.e. not reflecting any more significant losses from the legacy book) less than 0.5% for the medium term. This opinion balances the relatively benign economic environment, with increased underwriting conservatism and the high degree of secured lending.
Capitalisation is considered to be sound. IBP’s core equity tier 1 (“CET 1”) ratio and total capital adequacy ratio (“CAR”), both on the standardised approach, were 11.8% and 16.5% respectively at FY18. On full adoption of IFRS 9, at April 1st 2018, CET 1 impact was 77bps, of which a portion related to the legacy portfolio. The CAR is expected to remain at the top end of the targeted range of 14% to 17% over the medium term. A target CET 1 ratio above 10% is considered to be adequate. At FY18, the bank had a leverage ratio of 8.5%, which compares well to the UK major banks’ average of between 4.5% and 5.5%. We believe that this provides an adequate buffer in the unlikely event of significant economic downturn.
The financial performance of the bank is significantly supported by its wealth management business (50.8% of operating profit), which are good, stable capital light revenues. Without the drag of legacy cost, operating profit improved to GBP118m for 1H19 in comparison to GBP79m at 1H18. This trend is expected to continue over the medium term. Bank revenues are considered stable driven by enhanced focus on capital light business (48% of total revenue). However, growth strategies resulted in an increase in the cost base due to head count, infrastructure and digitisation.
IBP’s funding is considered stable, with the bulk of total customer deposits coming from retail deposits (structured, term and notice). However, in our opinion the funding profile doesn’t compare well to some high street banks which can gather large amounts of low cost, behaviourally stable transactional deposits. Positively, the bank holds strong levels of liquidity versus domestic peers. The bank (on a solo basis) reported a liquidity coverage ratio (“LCR”) and net stable funding ratio (“NSFR”) of 301% and 133% respectively at FY18, well above regulatory minima and the UK market average.
Material deterioration in the bank’s operating environment, causing a deterioration of asset quality, profitability and capital, could lead to negative rating action. Upward ratings action is contingent on maintaining satisfactory asset quality, improvement in profitability in the context of deteriorating operating conditions as heightened Brexit uncertainty will slow economic growth. Upward rating action may also stem from an unanticipated significant improvement in competitive position.
|INTERNATIONAL SCALE RATINGS HISTORY|
|Initial rating (October 2000)||Last rating (October 2017)|
|Long term: A-; Short term: A2||Long term: BBB+; Short term: A2|
|Outlook: Stable||Outlook: Positive|
|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
IBP 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 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.
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 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 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.|
|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.|
|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