Johannesburg, 31 May 2017 – 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 long term international scale local currency rating assigned to Nedbank Limited of BB+; with the outlook accorded as Negative.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Nedbank Limited (“Nedbank”, “the bank”) based on the following key criteria:
The accorded ratings reflect Nedbank’s well-established franchise, significant market share (being one of the largest banks in South Africa) and its status as a systemically important bank. The ratings also factor in the bank’s sound capital position, robust risk management systems, solid operating performance and conservative liquidity buffers. Offsetting these key rating strengths is South Africa’s challenging economic environment, weaker political and institutional stability, fragile investor confidence and increasing consumer pressure.
Nedbank is a wholly owned subsidiary of Nedbank Group Limited (“NedGroup”), which is in turn ultimately owned by Old Mutual Plc (“Old Mutual”). During 2016, Old Mutual announced its intention to unbundle its controlling 54.1% stake in NedGroup to a strategic minority position. This will be materially completed by end-2018. As a result, GCR assesses the strategic importance of NedGroup to Old Mutual as diminishing. Notwithstanding this, the forthcoming change in ownership structure and subsequent impact on the bank’s support environment is unlikely to affect Nedbank’s current ratings. The bank contributed 93.2% of NedGroup’s consolidated assets (FY15: 93.0%) and 90.6% (FY15: 75.5%) of pre-tax profits at FY16.
The bank’s capital position remained strong with the total capital adequacy and Tier 1 ratios increasing to 15.9% and 12.9% respectively at FY16 (FY15: 14.1% and 11.5%), well above the regulatory minima (of 8.375% and 10.375% respectively) and within internal targets. Notwithstanding this, IFRS 9, set to be implemented in 2018, is expected to lead to higher provisioning and earlier recognition of credit losses. Nedbank’s management expects a transitional increase in balance sheet provisions in line with IFRS 9 requirements, which are not expected to have a significant impact on regulatory capital adequacy levels (a parallel run is being conducted in 2017 to assess the likely impact).
Nedbank’s gross loan growth moderated to 3.8% at FY16 (FY15: 10.4%), in a difficult operating environment characterised by weak economic growth, rising interest rates, increased pressure on repayment ability (households and corporates) and reduced risk appetite. Accordingly, the industry average gross loan growth decelerated to 3.0% at end-2016 (2015: 11.3%). Nedbank’s gross non-performing loans (“NPLs”) grew by 16.0% in FY16 (FY15: 4.9%) and the above-trend increase was largely attributable to the implementation of the SARB-driven new curing definition, which resulted in cured defaulted accounts being classified as NPLs for six months after curing. Excluding this effect, NPLs grew by 5.0% in FY16, representing 2.7% of total gross loans at FY16 (FY15: 2.4%). The average industry gross NPL ratio was 2.9% at end-2016 (2015: 3.1%). Nedbank’s specific provisions covered 37.4% of NPLs at FY16 (FY15: 39.0%). Total coverage (specific plus general provisions) was 61.9% at FY16 (FY15: 67.3%). NPLs net of specific provisions amounted to 15.2% of regulatory capital at FY16 (FY15: 16.0%), indicating a reasonable buffer to withstand stress.
Pre-tax profit for FY16 rose 19.9% to R14.0bn (FY15: 3.1% growth). Earnings growth was supported by increases in net interest, fee and commission and trading income, and improvements in impairments. Overall, total operating income grew by 9.9% in FY16 (FY15: 5.2%), while operating costs grew by 8.3% (FY15: 6.7%), mainly driven by investments in IT, regulatory change programmes and staff related expenses. The cost ratio improved slightly to 58.3% in FY16 (59.1%). The ROaE and ROaA ratios were a higher 16.8% (FY15: 15.1%) and 1.1% (FY15: 1.0%) respectively for FY16.
Liquidity risk is well managed with the bank reporting a liquidity coverage ratio (“LCR”) of 109.3% at FY16, which was well above the Basel III phase in requirement of 80% effective on 1 January 2017. Furthermore, the Net Stable Funding Ratio (“NSFR”) was proforma compliant with the minimum regulatory requirement (100%) that becomes effective on 1 January 2018.
The fragile operating environment in South Africa, together with sovereign linked risk, makes an upgrade unlikely in the short to medium term. However, the bank’s ratings could benefit from its ability to significantly gain market share and further diversify its revenue sources. The ratings will be sensitive to a substantial deterioration in asset quality, long-term earnings (on the back of a constrained economic environment) and/or capital levels, as well as a weakened support floor. Furthermore, the international scale rating will be sensitive to changes in the sovereign rating of South Africa.
|NATIONAL SCALE RATINGS HISTORY||INTERNATIONAL SCALE RATING 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 (May 2016)||Last rating (May 2017)|
|Long-term: AA(ZA); Short-term: A1+(ZA)||Long-term (International LC): BB+|
|Outlook: Stable||Outlook: Negative|
Sector Head: Financial Institutions Ratings
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2017
South Africa Bank Statistical Bulletin (December 2016)
Absa rating reports (2000-16)
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 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, and GCR is satisfied that the public information available was sufficient.
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.
The information used to analyse Nedbank Limited and accord the credit ratings included:
- Audited financial results as at 31 December 2016 (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 SECTOR 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 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.|
|Collateral||Asset provided to a creditor as security for a loan.|
|Cost Ratio||The ratio of operating expenses to operating income. Used to measures a bank’s efficiency.|
|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 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.|
|Liquid Assets||Assets, generally of a short term, that can be converted into cash.|
|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.|
|Primary Capital||Primary capital consists of issued ordinary share capital, hybrid debt capital, perpetual preference share capital, retained earnings and reserves. This amount is then reduced by the portion of capital that is allocated to trading activities and other regulatory deductions.|
|Provision||The amount set aside or deducted from operating income to cover expected or identified loan losses.|
|Rating Outlook||Indicates the potential direction of a rated entity’s rating over the medium term, typically one to two years. An outlook may be defined as: ‘Stable’ (nothing to suggest that the rating will change), ‘Positive’ (the rating symbol may be raised), ‘Negative’ (the rating symbol may be lowered) or ‘Evolving’ (the rating symbol may be raised or lowered).|
|Regulatory Capital||The total of primary, secondary and tertiary capital.|
|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.|
|Secondary Capital||Secondary capital is mainly made up of subordinated debt, portfolio impairment and 50% of any revaluation reserves and other specified regulatory deductions.|
|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
GCR affirms Nedbank Limited’s rating of AA(ZA); Outlook Stable.