Johannesburg, 28 May 2015 — Global Credit Ratings has affirmed the national scale ratings assigned to Nedbank 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 Nedbank Limited of BBB; with the outlook accorded as Negative.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating(s) to Nedbank Limited (“Nedbank”, and/or “the bank”) based on the following key criteria:
Nedbank’s ratings reflect its continued strong financial profile, underpinned by healthy capitalisation, sound asset quality, stable earnings generation and conservative liquidity buffer. Furthermore, the ratings are supported by the bank’s significant market share (being the fourth largest bank in South Africa) and solid shareholder support, constrained by lacklustre macroeconomic conditions.
The bank remains comfortably capitalised, supported by solid core profitability, stable earnings retention and modest growth plans. At FYE14, the bank’s capital adequacy ratio (excluding unappropriated profits) rose to 14.3% from 13.6% at FYE13 (against a regulatory minimum of 10%), boosted by an increase in subordinated debt, strong growth in reserves and the aforementioned factors.
Asset quality trends continue to improve, driven by recoveries on previously written off loans, strong collections and prudent loan granting. Gross non-performing loans (“NPLs”) decreased by 11.1% in F14, following a 9.9% decline in F13. Subsequently, the bank’s gross NPL ratio dropped to 2.6% at FYE14 from 3.1% at FYE13, while its net NPL ratio correspondingly decreased to 0.8% from 1.1%, indicating adequate provisioning/NPL coverage.
As a consequence of the high levels of indebtedness, poor employment prospects, increased interest rates and weak confidence levels in the South African market, Nedbank’s wholesale credit growth continued to outpace retail advances, as the bank maintained its corporate and commercial sector focus, while retail credit demand waned.
Earnings have grown at a compound annual growth rate of 10.0% in the period F11-14. This has been a function of the bank’s growing loan book, higher levels of non-funded income (largely driven by transactional banking volume growth, ongoing client acquisitions and rising trading income), a stable cost structure, and sound asset quality which has minimised provisioning costs.
The bank’s balance sheet remains well funded by a diversified deposit mix that reflects growth in retail and commercial deposits, as well as a conservative term funding profile. Nedbank continued to maintain sound liquidity buffers, evidenced by the bank’s compliance with the Basel 3 Liquidity Coverage Ratio phase-in arrangement, exceeding the regulatory minimum of 60%.
The bank’s fragile operating environment increases the error margin on all forward looking scenarios. This, combined with sovereign linked risk, makes an upgrade unlikely at this stage. Downward pressure on Nedbank’s ratings could stem from a further deterioration in macroeconomic conditions, which could adversely affect its asset quality, capital base and earnings power.
The ratings above are unsolicited and accorded based on publicly available information.
|NATIONAL SCALE RATINGS HISTORY||INTERNATIONAL SCALE RATINGS HISTORY|
|Initial rating (Sep/2010)||Initial rating (July/2013)|
|Long-term: AA(ZA); Short-term: A1+(ZA)||Long-term: BBB|
|Outlook: Stable||Outlook: Stable|
|Last rating (July/2014)||Last rating (July/2014)|
|Long-term: AA(ZA); Short-term: A1+(ZA)||Long-term : BBB|
|Outlook: Stable||Outlook: Negative|
|Sector Head: Financial Institution Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2015
South Africa Bank Bulletin (2014)
Nedbank rating reports (2010-14)
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; c.) such rating was an independent evaluation of the risks and merits of the rated entity; 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 credit rating(s) above were not solicited by, or on behalf of, the rated client, and therefore, GCR has not been compensated for the provision of the rating(s). The ratings were accorded based on publicly available information.
The credit rating(s) above were disclosed to Nedbank Limited with no contestation of/changes to the ratings.
Nedbank Limited did not participate in the rating process, though GCR is satisfied that the public information available was sufficient.
The information used to analyse Nedbank Limited and accord the credit rating(s) included the 31 December 2014 audited financial statements (plus four years of comparative numbers); banking sector information (as supplied in the BA900 Reserve Bank of South Africa reports); and other publicly available information.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S FINANCIAL INSTITUTIONS GLOSSARY
|Asset||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|Asset Quality||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 (i.e. being paid back in accordance with their terms) and the likelihood that they will continue to perform.|
|Audited Financial Statements||Financial statements that bear the report of independent auditors (attesting to the financial statements’ fairness and compliance with generally accepted accounting principles).|
|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.|
|Capital Base||The issued capital of a company, plus reserves and retained profits.|
|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.|
|Credit Rating Agency||An entity that provides credit rating services.|
|Credit Risk||The possibility that a bond issuer or any other borrowers (including debtors/creditors) will default and fail to pay the principal and/or interest when due.|
|Creditworthiness||An assessment of a debtor’s ability to meet debt obligations.|
|Debt||An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.|
|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.|
|Financial Institution||An entity that focuses on dealing with financial transactions, such as investments, loans and deposits.|
|Interest||Scheduled payments made to a creditor in return for the use of borrowed money. The size of the payments will be determined by the interest rate, the amount borrowed or principal and the duration of the loan.|
|Interest Rate||The charge or the return on an asset or debt expressed as a percentage of the price or size of the asset or debt. It is usually expressed on an annual basis.|
|International Scale Rating||ISRs relate to either foreign currency or local currency commitments, assessing the capacity of an issuer to meet these commitments using a globally applicable (and therefore internationally comparable) scale.|
|Liabilities||All financial claims, debts or potential losses incurred by an individual or an organisation.|
|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. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price.|
|Liquidity Risk||The risk that a company may not be able to meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets. Regarding securities, the risk that a financial instrument cannot be traded at its market price due to the size, structure or efficiency of the market.|
|Long term||Not current; ordinarily more than one year.|
|Margin||The rate taken by the lender over the cost of funds, which effectively represents the entity’s profit and remuneration for taking the risk of the loan; also known as spread.|
|Maturity||The length of time between the issue of a bond or other security and the date on which it becomes payable in full.|
|National Scale Rating||The national scale 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.|
|Non-Performing Loan||When a borrower is overdue, typically 90+ days in arrears or as defined by the lender, or in the transaction documents.|
|NPL Ratio||The ratio of non-performing loans and advances to total gross loans and advances, expressed as a percentage.|
|Performing Loan||A loan is said to be performing if the borrower is paying the interest on it on a timely basis.|
|Portfolio||A collection of investments held by an individual investor or financial institution. They may include stocks, bonds, futures contracts, options, real estate investments or any item that the holder believes will retain its value.|
|Principal||The total amount borrowed or lent, e.g. the face value of a bond, excluding interest.|
|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.|
|Security||An asset deposited or pledged as a guarantee of the fulfilment of an undertaking or the repayment of a loan, to be forfeited in case of default.|
|Shareholder||An individual, entity or financial institution that holds shares or stock in an organisation or company.|
|Short Term||Current; ordinarily less than one year.|
|Solvent||The state of a company where its assets exceed its liabilities and it is able to service its debt and meet its other obligations, especially in the long-term.|
|Subordinated Debt||Debt that in the event of a default is repaid only after senior obligations have been repaid. It is higher risk than senior debt.|