Johannesburg, 31 August 2017 — Global Credit Ratings (“GCR”) has affirmed NMB Bank Limited’s long-term and short-term national scale ratings of BB+(ZW) and B(ZW) respectively; with the outlook accorded as Stable. The ratings are valid until August 2018.
SUMMARY RATINGS RATIONALE
The accorded ratings reflect NMB Bank Limited’s (“NMB”, “the Bank”) improving asset quality, decline in profitability, the prevailing weak macroeconomic environment, the Bank’s strong brand in the domestic market, as well as the financial and technical shareholder support available from reputable development finance institutions (“DFIs”), which maintain shareholdings through NMBZ Holdings Limited (“NMBZ”).
Cautious and more stringent lending led to a 15% reduction in advances during the year which reduced total on-balance sheet assets by 3.9% in FY16. Balances with the RBZ increased by 38%, as the Bank attempts to diversify its exposure to credit risk. The Bank’s asset quality improved in FY16 with the gross non-performing loan (“NPL”) ratio decreasing to 10.7% at FY16 (FY15: 13.2%), due to increased focus on collections, write-offs and disposal of a USD12.7m NPL to the Zimbabwe Asset Management Company (“ZAMCO1”). Special mention loans (defined as 30-90 days past due), decreased by 32.4% to account for 40.8% of gross loans at FY16 (FY15: 51.0%) while performing loans increased by 14.8% to account for 48.5% of gross loans at FY16 (FY15: 36%). The uncertain economic environment could pose challenges to NMB’s attempts to sustain improvements in asset quality.
Capitalisation improved in FY16 with core capital growing by 19.1% supported by a 48.5% growth in retained earnings. Tier 1 and total capital adequacy ratios were 20.6% and 23.3% at FY16 respectively (FY15: 16.0% and 19.3%), and remained well above the minimum regulatory requirements (of 8% and 12% respectively). The bank intends to meet the 2020 USD100m capital threshold through a combination of earnings growth and capital injections from the group (where necessary). However, IFRS 9 (set to be implemented in 2018) may lead to higher provisioning and earlier recognition of credit losses.
Profitability suffered with operating income declining by 8.8% to USD40.4m in FY16, driven by lower fees and commission income, trading income and a decline in interest income. Impairment charges also declined by 15.1% due to a reduction in loans and advances. Operating expenditure declined by 2.6%, as a result of the cost cutting drive undertaken by the bank to remain profitable in the face of declining interest and fee and commission incomes. Net profit before tax declined by 22.3% at FY16 to USD6.2m. ROaA and ROaE declined to 1.6% (FY15: 1.7%) and 9.7% (FY15: 11.8%) in FY16.
The Bank’s operations are mainly funded through customer deposits. The Bank’s total funding (excluding equity) decreased by 6.0% to USD261.9m in FY16. Depositor funding as a share of total funding (excluding borrowings of USD1.4m at FY16) increased from 77.2% in FY15 to 80.8% in FY16 as the Bank intends to increase depositor funding as it is less expensive and also reduces reliance on credit lines which expose the Bank to increased liquidity risk emanating from foreign currency shortages.
NMB’s ratings could be improved by substantial and sustained improvement in asset quality, profitability and the operating environment. The Bank’s ratings could be negatively impacted by further deterioration in earnings, stress on asset quality, a weakened support floor, and a further deterioration in operating conditions.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (December 2005)||Last rating (August 2016)|
|Long-term: BBB-(ZW); Short-term: A3(ZW)||Long-term: BB+(ZW); Short-term: B(ZW)|
|Outlook: Stable||Outlook: Stable|
Junior Credit Analyst
|Sector Head: Financial Institution Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions (March 2017)
NMB rating reports (2005-16)
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, 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 ratings have been disclosed to NMB Bank Limited with no contestation of the ratings.
Information received from NMB Bank Limited and other reliable third parties to accord the credit ratings included:
• Audited financial results as at 31 December 2016 (and four years comparative numbers)
• Unaudited interim results at 30 June 2017
• Budgeted financial statements for 2017
• 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
|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 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.|
|Bond||A long term debt instrument issued by either: a company, institution or the government to raise funds.|
|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.|
|Cost Ratio||The ratio of operating expenses to operating income. Used to measures a bank’s efficiency.|
|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.|
|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.|
|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.|
|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.|
|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.|
|Market Capitalisation||The total value of a company’s shares as quoted on a stock exchange. It is calculated by multiplying the total number of shares in issue by the market price.|
|Maturity||The length of time between the issue of a bond or other security and the date on which it becomes payable in full.|
|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.|
|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.|
|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.|
|Retained Earnings||Earnings not paid out as dividends by a company. Retained earnings are typically reinvested back into the business and are an important component of shareholders’ equity.|
|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.|
|Settlement Risk||The risk that an organisation gives, but fails to receive, consideration from a counterparty during the settlement of a transaction. The settlement may be cash or securities.|
|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.|
|Tier 1 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.|
|Treasury Bill||Short-term obligation backed by the government that bears no interest and is sold at a discount.|
For a glossary of terms please click here
GCR affirms NMB Bank Limited’s rating of BB+(ZW); Outlook Stable.