Announcements

GCR affirms National Housing Finance Corporation Soc Limited’s rating of AA-(ZA); Outlook Stable.

Johannesburg, 26 Nov 2014 — Global Credit Ratings has affirmed the national scale ratings assigned to National Housing Finance Corporation Soc 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 rating assigned to National Housing Finance Corporation Soc Limited of BBB; with the outlook accorded as Negative.

SUMMARY RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit rating(s) to National Housing Finance Corporation Soc Limited (“NHFC” or “the Corporation”) based on the following key criteria:

The NHFC’s ratings have historically been underpinned by the implicit support of its shareholder, the South African Government (“Government”), since NHFC plays a key role in facilitating the funding for Government’s human settlement plans. Given this, and the fact that the Corporation has been experiencing funding challenges, the shareholder injected R230m in September 2014 and has indicated its willingness to further recapitalise the Corporation over the next 3 years. That said, the Corporation appears well positioned to achieve its developmental objectives.

Driven by the securing of grant capital, NHFC is considered well capitalised. Furthermore, capitalisation ratios improved and are considered very strong. In line with the agreement with Government, the Corporation has a non-distribution of dividends policy to enhance its capital base.

Asset quality remains a constraining factor for the ratings, with the level of impaired loans rising to 14.3% of gross loans at FYE14 (FYE13: 13.9%). Moreover, GCR considers NHFC’s provisions and level of security held to be low.

Operating income grew by 11.3% to R189.0m in F14, with net interest income contributing the majority (96.6%). Higher impairments (F14: R28.1m, F13: R20.6m) and a lower cost ratio of 57.7% (F14) vs. 67.4% (F13), led net income to rise by 23.5% to R31.5m in F14 (F13: R25.5m). Looking forward, profitability could come under modest pressure, largely through higher provisioning costs and write-offs, given the increasingly challenging operating environment.

The Corporation’s deteriorating operating environment increases the error margin on all forward looking scenarios. This, combined with sovereign linked risk, makes an upgrade unlikely at this stage. In the longer term, improved asset quality indicators and supplementary shareholder support in the form of equity and debt funding will be positively considered.

A weakened support floor or, in the worst case, the complete absence of support, will negatively affect the national scale ratings. The national scale ratings will also be sensitive to further deterioration in asset quality, liquidity standing and/or the Corporation’s (in)ability to raise additional debt and equity funding. Furthermore, the international scale rating will be sensitive to changes in the sovereign rating of the country.

NATIONAL SCALE RATINGS HISTORY INTERNATIONAL SCALE RATINGS HISTORY
Initial rating (Feb/2004) Initial rating (Nov/2013)
Long term: AA-(ZA); Short term: A1+(ZA) Long term: BBB
Outlook: Stable Outlook: Stable
Last rating (Jul/2014) Last rating (Jul/2014)
Long term: AA-(ZA); Short term: A1+(ZA) Long term: BBB
Outlook: Stable Outlook: Negative

ANALYTICAL CONTACTS

Primary Analyst
Kurt Boere
Credit Analyst
(011) 784-1771
boere@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)
Banking Sector Bulletin (December 2013)
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; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.

The ratings above were solicited by, or on behalf of, the National Housing Finance Corporation Soc Limited, and therefore, GCR has been compensated for the provision of the ratings.

The National Housing Finance Corporation Soc Limited 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 the National Housing Finance Corporation Soc Limited with no contestation of the rating.

The information received from the National Housing Finance Corporation Soc Limited and other reliable third parties to accord the credit rating included the latest audited annual financial statements as at 31 March 2014 (plus four years of comparative numbers), most recent year to date unaudited published accounts to 30 September 2014, 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

Agreement

A negotiated and usually legally enforceable understanding between two or more legally competent parties.

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.

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.

Default

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

Dividend

A portion of the after-tax profits paid out to the owners of an entity as a return on their investment.

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.

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.

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.

GCR affirms National Housing Finance Corporation Soc Limited’s rating of AA-(ZA); Outlook Stable.

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