Johannesburg, 31 May 2016 — 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 local currency rating assigned to Nedbank Limited of BBB-; with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating(s) to Nedbank Limited (“Nedbank” or “the bank”) based on the following key criteria:
The ratings of Nedbank reflect its solid franchise and significant market share (being the fourth largest bank in South Africa). The ratings also factor in the bank’s healthy capitalisation, sound asset quality, satisfactory profitability and conservative liquidity buffers. However, these strengths are weighed against the increasingly challenging operating environment, characterised by an economic slowdown and consequential weakening credit environment.
Nedbank is a wholly owned subsidiary of Nedbank Group Limited (“the group”), which is in turn ultimately owned by Old Mutual Plc (“Old Mutual” or “the parent”). Old Mutual recently announced that it intends to unbundle four of its businesses (including the group) by 2018, aiming to reduce its shareholding in the group to a strategic minority position. The forthcoming change in ownership structure and subsequent impact on the bank’s support environment is yet to be seen and thus does not affect Nedbank’s current ratings.
The bank remains comfortably capitalised, although its capital ratios decreased due to growth in risk weighted assets that included the industry wide removal of the zero-risk weighted credit valuation adjustment on over-the-counter (“OTC”) ZAR based derivatives and OTC derivatives with local counterparties not cleared through a central counterparty (implemented in 2015). Nedbank’s Tier 1 and total capital ratios also declined to 11.5% and 14.1% respectively at FYE15 (FYE14: 12.1% and 14.7%) as a result of the redemption of the old-style Hybrid Debt instrument in F15 and further grandfathering of old-style Tier 2 debt capital in line with the increasing regulatory phasing requirements, but remained above the regulatory minima (of 8% and 10% correspondingly) and within internal targets.
As a consequence of South Africa’s high indebtedness levels, poor employment prospects, increased interest rates and weak confidence levels, Nedbank’s wholesale credit growth continued to outpace retail advances. Nedbank continues to sustain a healthy loan portfolio, displaying a relatively low gross non-performing loan (“NPL”) ratio (FYE15: 2.5%), which has trended downwards since 2009 following the bank’s implementation of its strategic portfolio tilt strategy. In F15, retail impairment reductions were offset by increased impairments in the wholesale portfolio, largely due to ratings migration as a result of deteriorating economic conditions and the weak oil and commodity cycle. As a result, at FYE15, NPLs increased 4.6% to R16bn and the specific coverage ratio decreased to 40.0% (FYE14: 44.1%), due to the South African Reserve Bank directive 7/2015 which impacted the specific coverage ratio by 3.5%, and the change in advances mix towards wholesale advances.
In F15, operating income grew 5.2%, driven by higher trading income and transactional revenue, offsetting slightly narrower net interest margins. The cost ratio increased to 59.1% (F14: 58.3%), largely due to lower net interest income growth of 3.0% (2014: 7.1%). On balance, net income increased by 2.0% to R8.2bn, and ROaA and ROaE declined to 1.0% and 15.1% respectively (F14: 1.1% and 16.1%). Although the bank’s net interest margin widened marginally in Q1 F16 (benefiting from endowment income following interest rate increases), the negative effects of ongoing asset mix changes and higher funding costs relating to Basel III requirements are expected to put pressure on returns and increase costs of compliance across the sector. The bank’s balance sheet remains well funded by a diversified deposit base. Liquidity risk is mitigated by a stable deposit base and surplus liquidity buffers, evidenced by the group’s liquidity coverage ratio of 88.5% at FYE15, which exceeded the minimum regulatory minimum of 60% (in 2015).
Nedbank’s aforementioned resilient performance could be negatively impacted by South Africa’s prevailing economic challenges, which could exert pressure on asset quality indicators, earnings and capital generation. Nonetheless, the new regulatory requirements are expected to lead to lower levels of risk going forward. Given the challenging operating conditions in South Africa, together with the sovereign linked risk, there is currently limited upside potential for Nedbank’s ratings. However, the bank’s ratings could benefit from its ability to significantly gain market share and further diversify its revenue sources. 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). In addition, the bank’s ratings would be impacted by a weakened support floor.
The ratings above are unsolicited and accorded based on publicly available information.
|NATIONAL SCALE RATINGS HISTORY||INTERNATIONAL SCALE RATINGS HISTORY|
|Initial rating (September 2010)||Initial rating (July 2013)|
|Long-term: AA(ZA); Short-term: A1+(ZA)||Long-term (International LC): BBB|
|Outlook: Stable||Outlook: Stable|
|Last rating (December 2015)||Last rating (December 2015)|
|Long-term: AA(ZA); Short-term: A1+(ZA)||Long-term (international LC): BBB-|
|Outlook: Stable||Outlook: Stable|
|Primary Analyst||Committee Chairperson|
|Kuzivakwashe Murigo||Omega Collocott|
|Credit Analyst||Sector Head: Financial Institution Ratings|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, March 2016
South Africa Bank Bulletin (May 2016)
Nedbank rating reports (2010-15)
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 POINTS 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 ratings above were not solicited by, or on behalf of, the rated client, and therefore, GCR has not been compensated for the provision of the ratings. The ratings were accorded based on publicly available information.
The credit ratings above were disclosed to Nedbank Limited with no contestation of/changes to the ratings.
Nedbank Limited participated in the rating process and provided commentary to the rating report, and GCR is satisfied that the public information available was sufficient.
The information used to analyse Nedbank Limited and accord the credit ratings included:
- Audited financial results as at 31 December 2015 (and four years of comparative numbers)
- Banking sector information (as supplied in the BA900 Reserve Bank of South Africa reports)
- Industry comparative data
- 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||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 Base||The issued capital of a company, plus reserves and retained profits.|
|Cost Ratio||The ratio of operating expenses to operating income. Used to measures a bank’s efficiency.|
|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.|
|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.|
|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 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. 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.|
|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, as well as how the position may change in the future with regard to meeting longer term financial obligations.|
|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.|
|Net Interest Margin||Net interest income divided by average interest earning assets. Measures a bank’s margin after paying funding sources and how successful a bank’s interest-related operations are.|
|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.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|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.|
|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
GCR affirms Nedbank Limited’s rating of AA(ZA); Outlook Stable.