Rating Action
Johannesburg, 10 July 2020 – GCR Ratings (“GCR”) has affirmed Nedbank Limited’s unsolicited South African long term and short term issuer ratings of AA(ZA)/A1+(ZA). At the same time, the unsolicited international scale long term issuer rating has been affirmed at BB. The Outlooks are Negative.
| Rated Entity | Rating class | Rating scale | Rating | Outlook/Watch |
| Nedbank Limited | Long Term issuer | National | AA(ZA) | Negative |
| Short Term issuer | National | A1+(ZA) | – | |
| Long term issuer | International | BB | Negative |
The rating action follows a reduction in the South African country and financial institutions sector risk assessments.
- On June 24, 2020, the South African Financial Institutions sector risk score was lowered to 7.5, from 8.0 previously. Click here to access link.
- The South African country risk score was also lowered to 7.0, from 7.5 previously, in a market alert released on the 27th May 2020. Click here to access link.
Combined, the above country and sector risk scores comprise the operating environment score, which is a key input into GCR’s ratings.
Rating Rationale
Nedbank Limited’s (“Nedbank”) unsolicited national and international scale ratings outlooks have been placed on Negative, reflecting the worsening operating environment in South Africa (the group’s core market), leading to a broadly negative overlay on the South African financial institutions sector. The reduction in the operating environment score, together with expected earnings pressure and deteriorating asset quality are pressurising the current ratings.
The unsolicited ratings of Nedbank are based on the credit profile of Nedbank Group Limited (“the group”). Nedbank is regarded as the core operating entity within the group and accounts for just over 93% of group assets. Accordingly, the operating environment is anchored to the South African country and sector risk scores and the impact of foreign exposures is limited.
The ratings reflect the group’s entrenched position in the local market, wide array of product offerings that are diversified by business segment and sub-segments (including a leading position in commercial property lending) and historically well managed risk profile allowing for strong margin returns, although the risk position is expected to weaken going forward. These strengths are balanced by adequate capital and leverage and market aligned funding and liquidity.
Nedbank’s competitive positioning benefits from its strong local footprint, with assets representing around 18% of total industry assets at December 2019, making it one of the country’s more established banks. The oligopolistic sector structure prevents undue competitive pressure which is beneficial for pricing and earnings stability, as reflected by historically strong and consistent profit margins. The group also has a presence across several regional markets through subsidiaries and partnerships (the most notable being the 20% stake in Ecobank Transnational Holdings (“Ecobank”), an entity with a broad African footprint), as well as exposure to more developed markets across Europe (mostly wealth management).
Nedbank is viewed to be adequately capitalised. GCR believes that the bank possesses sufficient capital buffers to withstand the negative impact of the COVID-19 pandemic, including dividend suspensions through the next year and a half (thereby preserving capital). These measures will soften the impact of expected earnings compression (through lower net interest margins, reduced fee and commission income and higher credit losses) that will limit organic capital generation over the next 18 months. GCR believes core capital ratios can be maintained through the transitional period until the economy begins to normalise, as the bank will continue to maintain strict underwriting discipline (notwithstanding government/central bank directives encouraging more lending) and broadly lower credit growth that could limit undue leverage. The GCR capital ratio is expected to range from 12%-12.5% over the short to medium term.
The negative economic outlook, compounded by uncertain medium to longer term prospects arising from the COVID-19 pandemic will introduce higher stresses to asset quality than could have been anticipated. Consequently, credit losses are likely to rise quite sharply over the next two years, on the back of rising retail defaults in the short-term and in the longer-term, potential strain from the strongly performing commercial property portfolio, although the impact of this will be cushioned by very strong collateral levels. As a result, GCR expects credit losses to hover around 1.5%-1,75%, which is some distance above the historical trend of between 0.5%-0.8%.
Funding and liquidity is viewed to be neutral to the rating. The group is exposed to the same structural funding risks as the other top tier South African banks, i.e. medium-term wholesale funding concentrations with financial corporates. The Liquidity Coverage Ratio (“LCR”) and Net Stable Funding Ratio (“NSFR”) were at 110% at 1Q F20 respectively. While the LCR is below the industry average, this is balanced by a better than average NSFR ratio. Furthermore, loans to deposits have been trending downward over the past three years, registering at 90% at FY19 (FY17: 93.6%), and the group is viewed to hold sufficient liquidity to meet short term funding obligations in a stress scenario.
Outlook Statement
The Negative outlooks reflect the worsening operating environment in South Africa (the group’s core market), leading to a broadly negative overlay on the South African financial institutions sector. The reduction in the operating environment score, together with expected earnings pressure and deteriorating asset quality are the key rating drivers.
Rating Triggers
Should credit losses rise significantly above expectations and industry peers, the rating will be downgraded as this will also impede capital generative capacity and constrain risk based capital adequacy. The international scale rating could also be lowered if the country risk of South Africa deteriorates, most likely due to the weakening position of its sovereign. A reversion to a stable outlook could arise on the back of better than expected credit losses, or sustained GCR capital ratio above 12% over the outlook horizon which would reflect adequate capital generative capacity to absorb the peak of the anticipated shocks.
Analytical Contacts
| Primary analyst | Vinay Nagar | Senior Financial Institutions Analyst |
| Johannesburg, ZA | Vinay@GCRratings.com | +27 11 784 1771 |
| Committee chair | Matthew Pirnie | Group Head of Ratings |
| Johannesburg, ZA | MatthewP@GCRratings.com | +27 11 784 1771 |
Related Criteria and Research
| Criteria for the GCR Ratings Framework, May 2019 |
| Criteria for Rating Financial Institutions, May 2019 |
| GCR Ratings Scale, Symbols & Definitions, May 2019 |
| GCR Country Risk Scores, May 2020 |
| GCR Financial Institutions Sector Risk Score, June 2020 |
Ratings History
Nedbank Limited
| Rating class | Review | Rating scale | Rating class | Outlook | Date |
| Issuer Long Term | Initial | National | AA(ZA) | Stable | September 2010 |
| Last | National | AA(ZA) | Stable | August 2019 | |
| Initial | International | BBB | Stable | July 2013 | |
| Last | International | BB | Stable | August 2019 | |
| Issuer Short Term | Initial | National | A1+(ZA) | N/a | September 2010 |
| Last | National | A1+(ZA) | N/a | August 2019 |
RISK SCORE SUMMARY
| Rating Components & Factors | Risk scores |
| Operating environment | 14.50 |
| Country risk score | 7.00 |
| Sector risk score | 7.50 |
| Business profile | 1.00 |
| Competitive position | 1.00 |
| Management and governance | 0.00 |
| Financial profile | 0.50 |
| Capital and Leverage | (0.50) |
| Risk | 1.00 |
| Funding and Liquidity | 0.00 |
| Comparative profile | 0.00 |
| Group support | 0.00 |
| Government support | 0.00 |
| Peer analysis | 0.00 |
| Total Score | 16.00 |
Glossary
| Balance Sheet | Also known as 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. |
| Capital | The sum of money that is invested to generate proceeds. |
| Cash | Funds that can be readily spent or used to meet current 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. |
| Diversification | Spreading risk by constructing a portfolio that contains different exposures 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. |
| Exposure | Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For a company, its exposure may relate to a particular product class or customer grouping. Exposure may also arise from an overreliance on one source of funding. In insurance, it refers to an individual or company’s vulnerability to various risks |
| Income | Money received, especially on a regular basis, for work or through investments. |
| 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. |
| Issuer | The party indebted or the person making repayments for its borrowings. |
| Leverage | With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt. |
| 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. |
| Long Term Rating | See GCR Rating Scales, Symbols and Definitions. |
| Margin | A term whose meaning depends on the context. In the widest sense, it means the difference between two values. |
| Market | An assessment of the property value, with the value being compared to similar properties in the area. |
| Maturity | The length of time between the issue of a bond or other security and the date on which it becomes payable in full. |
| Rating Outlook | See GCR Rating Scales, Symbols and Definitions. |
| Risk | The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives. |
| Short Term Rating | See GCR Rating Scales, Symbols and Definitions. |
| Short Term | Current; ordinarily less than one year. |
SALIENT POINTS OF ACCORDED RATINGS
GCR affirms that a.) no part of the ratings was influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The credit ratings have not been disclosed to the rated entity.
The ratings were unsolicited, and therefore, GCR has been not been compensated for the provision of the ratings.
Nedbank Limited, did not participate in the ratings process, however the quality of public disclosure from audited accounts and risk management booklets, alongside regulatory returns, meets out information sufficiency requirements.
