Johannesburg, 30 April 2018 — Global Credit Ratings (“GCR”) has affirmed Nedbank Zimbabwe Limited’s long-term and short-term national scale ratings of A(ZW) and A1(ZW) respectively; with the outlook accorded as Stable. The ratings are valid until April 2019.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings Nedbank Zimbabwe Limited (“Nedbank Zimbabwe”, “the bank”), formerly MBCA Bank Limited (“MBCA”), based on the following key criteria:
The ratings accorded to Nedbank Zimbabwe reflect its fairly resilient credit profile within a challenging operating environment (characterised by weak economic activity, and cash and foreign currency shortages), underpinned by healthy capitalisation, strong financial and liquidity profiles. The ratings also reflect the bank’s increasing albeit small balance sheet, the improving competitive position envisaged following rebranding to Nedbank, and the implied support from the bank’s parent Nedbank Group Limited (“Nedbank Group “the group”).
MBCA rebranded to Nedbank Zimbabwe towards the end of Q1 2018. The rebranding is expected to competitively position the bank relative to peers in terms of attracting retail and/or corporate clients for transactional activities. Non-funded income remains the most significant contributor to the bank’s revenues (51.9% at both FY16 and FY17) and coupled with a strong IT infrastructure being put in place, maximising on the transactional income opportunity set is envisaged.
Full profit retention has supported a healthy capital build over the past 5 years, with the bank targeting to meet the USD100m regulatory minimum capital threshold set for 2020 organically. In that regard, core capital grew by 15% to USD55.1m at FY17, remaining well above the current regulatory minimum of USD25m. Accordingly, the bank’s risk-weighted capital adequacy ratio registered at 32% at FY17 (FY16: 27.2%), comfortably exceeding the regulatory minimum ratio of 12%. Implementation of IFRS 9 (an expected loss model) in 2018 will result in higher provisioning requiring write-down of asset valuations. Although quantification of IFRS 9 impact is still being finalised, management views the capital buffer (mainly retained earnings) to be sufficient to absorb the expected higher impairment charge, taking cognisance of the bank’s internal capital generation rate that has registered around 13-14% over the past 5 years.
However, the risk profile of the bank’s loan book compares less favourably to peers, as reflected by the bank’s gross non-performing loan (“NPL”) ratio which increased to 7.7% at FY17 (FY16: 7.1%, FY15: 6.2%) exceeding the industry average of 7.1%. In addition, the arrears portfolio (past due but not impaired) grew substantially by 342% to USD5.3m at FY17 (FY16: USD1.3m). Specific provision (pre-collateral) coverage for NPLs decreased to 41.3% at FY17 (FY16: 60.6%). Consequently, loan portfolio risk exposures evidence moderately low albeit increasing potential to capital erosion based on current levels as illustrated by net NPLs amounting to a higher 8.3% of total regulatory capital at FY17 (FY16: 5.6%).
The bank’s net profit before tax rose 54.0% to USD10.7m in FY17 from USD7m in the prior year, supported by the growth in net interest and non-interest income of 10.4% and 19.5% respectively and reduction in impairments (positive charge due to recoveries). However, margin pressure continued to be noted in FY17, partly owing to the capping of lending rates by the Reserve Bank of Zimbabwe at 12% which took effect April 2017, and the bank’s low appetite for the alternative high yield government treasury bills. Overall, the ROaA and ROaE increased to 2.4% and 15% respectively in FY17 (FY16: 2.1% and 12.4%).
Despite its retail growth strategy, the bank’s funding profile continues to be supported by its large corporate deposit book (40.9% of customer deposits at FY17), and remains susceptible to shocks, given its exposure to potentially volatile wholesale deposits. To manage liquidity risk, the bank maintains high levels of liquidity and at FY17 the prudential liquidity ratio was well above the statutory minimum of 30%.
Strengthening of the business profile, supported by enhanced competitive position, stable/improving asset quality, and strong earnings generation, could trigger a positive rating action. A negative rating action will likely follow weakened shareholder support, coupled with a deterioration in key credit protection metrics.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (August 2007)||Last rating (April 2017)|
|Long term: A(ZW); Short term: A1(ZW)||Long term: A(ZW); Short term: A1(ZW)|
|Outlook: Stable||Outlook: Stable|
|Primary Analyst||Secondary Analyst|
|Simbarake Chimutanda||Kudzanai Samanga|
|Credit Analyst||Junior Credit Analyst|
|(011) 784-1771||(011) 784-1771|
|Senior Credit Analyst|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions (March 2017)
Nedbank Zimbabwe rating reports, formerly MBCA, (2007-17)
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 ratings were 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.
Nedbank Zimbabwe Limited participated in the rating process via face-to-face management meetings and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit ratings have been disclosed to Nedbank Zimbabwe Limited with no contestation of the ratings.
The information received from Nedbank Zimbabwe Limited and other reliable third parties to accord the credit ratings included:
- Audited financial results as at 31 December 2017 (and four years of comparative numbers);
- Budgeted financial statements for 2018-2020;
- A breakdown of facilities available and related counterparties;
- Corporate governance and enterprise risk framework; and
- Industry comparative data.
The ratings above were solicited by, or on behalf of, Nedbank Zimbabwe Limited, and therefore, GCR has been compensated for the provision of the ratings.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S FINANCIAL INSTITUTIONS GLOSSARY
|Arrears||An overdue debt, liability or obligation. An account is said to be ‘in arrears’ if one or more payments have been missed in transactions where regular payments are contractually required.|
|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.|
|Audit Report||A written opinion of an auditor (attesting to the financial statements’ fairness and compliance with generally accepted accounting principles).|
|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|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.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Collateral||Asset provided to a creditor as security for a loan.|
|Corporate Governance||Refers to the mechanisms, processes and relations by which corporations are controlled and directed, and is used to ensure the effectiveness, accountability and transparency of an entity to its stakeholders.|
|Credit Rating Agency||An entity that provides credit rating services.|
|Customer Deposit||Cash received in exchange for a service, including safekeeping, savings, investment, etc. Customer deposits are a liability in a bank’s books.|
|Financial Institution||An entity that focuses on dealing with financial transactions, such as investments, loans and deposits.|
|Financial Statements||Presentation of financial data including balance sheets, income statements and statements of cash flow, or any supporting statement that is intended to communicate an entity’s financial position at a point in time.|
|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.|
|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.|
|National Scale Rating||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.|
|Net Profit||Trading/operating profits after deducting the expenses detailed in the profit and loss account (including taxes).|
|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.|
|Provision||The amount set aside or deducted from operating income to cover expected or identified loan losses.|
|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.|
|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.|
|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 Zimbabwe Limited’s rating of A(ZW); Outlook Stable.