Johannesburg, 27 Aug 2015 — Global Credit Ratings has affirmed the national scale ratings assigned to NMB Bank Limited of BB+(ZW) and B(ZW) in the long term and short term respectively; with the outlook accorded as Stable. The rating(s) are valid until August 2016.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating(s) to NMB Bank Limited (“NMB” and/or “the Bank”) based on the following key criteria:
The ratings of NMB Bank reflect a diminished loss absorption capacity (in terms of a high level of delinquent loans relative to capital) and the challenges being faced in arresting asset quality deterioration, in the prevailing weak macroeconomic environment. The ratings, however, recognise the shareholder support element derived from reputable development finance institutions (“DFIs”), and the Bank’s strong brand.
Although the Bank’s gross non-performing loan (“NPL”) ratio decreased to 17.7% at FYE14 (FYE13: 19.9%), due to increased focus on recoveries and tighter credit controls, it remained above the industry average of 15.9%. This is compounded by the high level of special mention loans (defined as 30-60 days past due), which equated to 1.9x capital at FYE14 (FYE13: 1.7x). GCR believes that although NMB is on track to resolve its credit profile problems (with positive note taken of the progress made thus far), it is likely to take time for substantial tangible benefits from stronger risk management to feed through to traditional asset quality measures, given the protracted operating environment challenges.
Subsequent to raising fresh equity and subordinated debt (of USD15.0m and USD1.4m respectively) in the prior review period, the Bank augmented its capital base further in F14 through organic growth. To this end, the Bank’s capital adequacy ratio increased to 19.3% at FYE14 (FYE13: 17.3%), remaining well above the regulatory minimum of 12%. However, considering the high level of past due loans, NMB’s capital remains vulnerable to further loan quality deterioration.
Despite registering a reduction in operating income (owing to a deceleration in lending and slowdown in collections), NMB returned to profitability in F14 (after posting a loss in F13), driven by a 69.9% reduction in impairment costs coupled with contained operating expenditure. In the absence of unexpected impairment charges, the Bank’s underlying profitability is expected to improve at full year (FYE15), after posting pre-tax income of USD2.6m at 1Q F15 (which was 1.4x higher than the previous corresponding period).
Due to the nature of its funding (ie, primarily short term deposits), NMB (like most Zimbabwean banks) carries significant maturity mismatches, which exposes the Bank to liquidity risk. This is further exacerbated by the wholesale nature of the majority of its deposits, which render it susceptible to external shocks. However, the Bank has managed to navigate the severe market liquidity challenges and maintained its liquidity ratio above the statutory minimum for much of the period under review. In addition, the Bank’s liquidity position is supported by access to credit lines, which have fairly long grace periods, thereby providing a float.
An upward movement in the bank’s ratings is contingent on a substantial and sustained improvement in asset quality, profitability and the operating environment. NMB’s ratings could be negatively impacted by additional asset quality stress (which might exert pressure on earnings and capital), a weakened support floor, and a further deterioration in operating conditions.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (Dec/2005)|
|Long term: BBB-(ZW); Short term: A3(ZW)|
|Last rating (Aug/2014)|
|Long term: BB+(ZW); Short term: B(ZW)|
|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, updated March 2015
Zimbabwean Bank Statistical Bulletin (June 2015)
NMB rating reports (2005-14)
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, security or financial instrument being rated; and c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
NMB Bank 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 rating/s has been disclosed to NMB Bank Limited with no contestation of the rating/s.
Information received from NMB Bank Limited and other reliable third parties to accord the credit rating(s) included:
- Audited financial results as at 31 December 2014 (and four years of comparative numbers)
- Unaudited interim results at 31 March 2015
- Budgeted financial statements for 2015
- Latest internal and/or external audit report to management
- A breakdown of facilities available and related counterparties
- Corporate governance and enterprise risk framework
The ratings above were solicited by, or on behalf of, NMB Bank 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
|Asset||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|Asset Quality||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 (i.e. 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.|
|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.|
|Capital Base||The issued capital of a company, plus reserves and retained profits.|
|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.|
|Credit Rating Agency||An entity that provides credit rating services.|
|Credit Risk||The possibility that a bond issuer or any other borrowers (including debtors/creditors) will default and fail to pay the principal and/or interest when due.|
|Creditworthiness||An assessment of a debtor’s ability to meet debt 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.|
|Equity||Equity (or shareholders’ funds) is the holding or stake that shareholders have in a company. Equity capital is raised by the issue of new shares or by retaining profit.|
|Exchange||A standardised marketplace in which different assets are traded.|
|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.|
|Income Statement||A summary of all the expenditure and income of a company over a set period.|
|Insolvent||When an entity’s liabilities exceed its assets.|
|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.|
|Liabilities||All financial claims, debts or potential losses incurred by an individual or an organisation.|
|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.|
|Maturity||The length of time between the issue of a bond or other security and the date on which it becomes payable in full.|
|National Scale Rating||The national scale 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.|
|Non-Performing Loan||When a borrower is overdue, typically 90+ days in arrears or as defined by the lender, or in the transaction documents.|
|Off Balance Sheet||Off balance sheet items are assets or liabilities that are not shown on a company’s balance sheet. They are usually referred to in the notes to a company’s accounts.|
|Past Due||Any note or other time instrument of indebtedness that has not been paid on the due date.|
|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.|
|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.|
|Securities||Various instruments used in the capital market to raise funds.|
|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.|
|Subordinated Debt||Debt that in the event of a default is repaid only after senior obligations have been repaid. It is higher risk than senior debt.|