Johannesburg, 8 July 2021 – GCR Ratings (“GCR”) has affirmed the unsolicited national scale long and short-term issuer ratings of Nedbank Limited at AA(ZA)/A1+(ZA), with a Negative Outlook. At the same time, the unsolicited international scale long-term issuer rating has been affirmed at BB, Negative Outlook maintained. GCR has also assigned an unsolicited short-term international scale rating of B.
The unsolicited ratings of Nedbank Limited (“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 under 91% of group assets. Accordingly, the ratings are equalised to the group Anchor Credit Evaluator and the operating environment is anchored to the South African country and sector risk scores. The impact of foreign exposures is limited.
The ratings reflect the group’s position as one of the dominant financial institutions in the South African banking sector underpinned by a strong franchise, good risk profile with well contained credit losses, adequate capital and sound liquidity that caters for the relatively higher exposure to wholesale type funding.
The group’s competitive positioning benefits from its strong local footprint, with total assets representing around 17% of industry assets at December 2020, 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).
Overall asset quality weakened, although within our expectations with GCR calculated credit losses at 1.5%, comparing favourably to the sector average. However, non-performing loans (“NPLs”) were above the industry average at 5.4%. The main driver of weaker asset quality was the highly strained operating environment which required significant provision overlays in the first half of the year. Retail and business banking was particularly negatively impacted, reporting elevated credit losses of 2.4% vs. 1.4% the prior year.
While we think the severity of the economic stress has moderated, the group’s loan book is exposed to sectors we consider vulnerable, including Commercial Real Estate (“CRE”) which represented around 22% of total group advances. Credit losses are currently contained in the CRE portfolio at 0.54% and loan-to-value ratios are low at 50%, albeit rising. There is uncertainty as to how the CRE sector will emerge from the pandemic and there may be structural shifts in the underlying dynamics of the sector that could create pockets of vulnerability in the future and expose the group to further collateral revaluation risk which could lead to upward pressure on credit losses over the longer term.
Based on sectoral trends during the second half of 2020 and year to date 2021, loan collections have improved and the percentage of borrowers under some form of payment relief has reduced. Accordingly, while longer term risks still linger, over the short to medium term, we expect asset quality to slightly improve, with credit losses likely to moderate to around 1.3% over the next 12-18 months.
The GCR total capital ratio reduced to 11.7% in FY20 (FY19: 12.2%) due to the pandemic induced earnings shock, although at these levels, considered to be intermediate. The group has eroded some of its previous capital buffers and opted not to declare an interim dividend post the 2020 year end. We expect earnings to improve over the next two years based on positive trends in core earnings drivers such as lower credit impairments and stronger fee based transactional income, which could support GCR total capital at 11.6% over the rating horizon. However, we believe earnings may remain below historical levels and coupled with the potential resumption in dividends and moderate loan growth expectations, could keep the GCR total capital ratio below the peer average for a prolonged period.
Funding and liquidity is neutral to the ratings, balancing the group’s higher reliance on wholesale funding (36.1%) relative to peers against good liquidity buffers. Of the top four banks, the group has the largest market share of wholesale deposits at 23.3% although this is a function of the sectoral funding structure. From a regulatory point of view the net stable funding ratio (“NSFR”) was adequate at 112% and the Liquidity Coverage Ratio (“LCR”) was sound at 125.7%. We expect this level of liquidity strength to persist and continue to offset exposure to more sensitive sources of funding.
The national scale rating has been maintained on a Negative outlook as capital and leverage deteriorated beyond expectations and could remain weaker than our peer projections over the next 12-18 months. This would leave the group more susceptible to any further economic stress which could weaken the overall credit profile relative to the South African banking peers. Nonetheless, we expect a rebound in earnings in 2021, but dividend resumptions and moderate loan growth may pin the GCR total capital ratio to around 11.6% over the next 12-18 months. Positively, credit losses are positioned to improve to below 1.3% in 2021 following the spike in 2020, as economic conditions have shown signs of improvement in the first half of the year, while existing provision overlays cater for any untoward shocks. The Negative outlook on the international scale factors in the uncertainty of the operating environment, which could negatively impact the country and sector risk scores causing a downgrade to the ratings.
Upward movement on the ratings are limited, given the Negative outlook and broadly negative sentiment in the operating environment score, but over the medium term, a material improvement in the South African economy and continued resilience of the banking sector could see the international scale outlook revert to Stable. The outlook on the national scale ratings could be changed to Stable should earnings and asset quality stabilise, supporting a GCR total capital ratio of above 12%. Over the medium term, an upgrade of the national scale ratings may stem from a shift towards more retail based funding while maintaining sound liquidity and better than average asset quality. The international scale ratings could be downgraded if the operating environment score is lowered, while downward rating pressure on the national scale ratings could emanate from sustained earnings weakness that causes the GCR total capital ratio to moderate below 11% for a prolonged period. Further to this, any further deterioration in asset quality and erosion of liquidity buffers could result in negative ratings action.
|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, June 2021|
|GCR Financial Institutions Sector Risk Score, June 2021|
|Rating class||Review||Rating scale||Rating class||Outlook||Date|
|Long Term Issuer||Initial||National||AA(ZA)||Stable||September 2010|
|Short Term Issuer||Initial||National||A1+(ZA)||N/a||September 2010|
Risk Score Summary
|Rating Components & Factors||Risk scores|
|Country risk score||7.00|
|Sector risk score||7.50|
|Management and governance||0.00|
|Capital and Leverage||(0.50)|
|Funding and Liquidity||0.00|
|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 not been compensated for the provision of the ratings.
Nedbank Limited did not participate in the rating process, however, the quality of public disclosure from audited accounts and risk management booklets, alongside regulatory returns, meets our information sufficiency requirements.