Johannesburg, 24 May 2018 – Global Credit Ratings has affirmed the national scale ratings assigned to Sasfin Bank Limited of BBB+(ZA) and A1-(ZA) in the long term and short term respectively; with the outlook accorded as Stable. Furthermore, Global Credit Ratings has accorded a long-term international scale local currency rating to Sasfin Bank Limited of B+; with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Sasfin Bank Limited (“Sasfin” or “the bank”) based on the following key criteria:
The long-term national scale rating of Sasfin reflects its entrenched business model that targets niche markets of business and wealth clients, risk appropriate capital cushioning, diversified funding profile, and improved business profile stemming from a restructuring program, supporting the bank’s standalone credit profile. Offsetting these key ratings strengths is the weakening credit environment consequently impairing the bank’s asset quality, and volatility in earnings, coupled with an increasing cost base that has applied pressure on the quality of the underlying earnings. The ratings do not consider any systemic support uplift given low intervention prospects.
The bank is the main operating subsidiary of Sasfin Holdings Limited, a well-established franchise offering specialist products and services in South Africa’s major cities through three pillars: Wealth; Bank; and Capital. The bank underwent a restructuring program in FY17 that resulted in significant changes to the executive committee. In addition, a new shareholder of reference WIPHOLD was approved by the South African Reserve Bank, providing additional comfort in times of financial stress. Overall, Sasfin’s business profile improved.
Sasfin registered total and Tier 1 capital adequacy ratios of 15.6% (FY16: 19.5%) and 15.2% (FY16: 18.9%) at FY17 respectively, which were comfortably above the regulatory capital minima albeit softening. The capital buffer provides ample cushion for loss absorption and growth. The bank remains focused on lengthening the funding base in order to strengthen the balance sheet given economic volatility.
However, the bank loan book remains highly susceptible to a weakening credit environment. The bank’s less granular portfolio (trade and debtor finance) increased the impact of single name losses from credit events that occurred during the period under review. That said, gross non-performing loans (“NPLs”) ratio albeit having improved at FY17 (5.2%) following deterioration at FY16 (6.6%), rose to 5.9% at 1H FY18. Nonetheless, specific provision coverage for NPLs elevated to 55.0% at FY17 (FY16: 37.9%). The bank remains committed to stringent underwriting standards, rigorous post-disbursement monitoring, strong recovery procedures, and improving granularity of the loan book to contain NPL formation and minimise impact of single name losses. Accordingly, loan growth moderated to 4.1% at FY17 (FY16: 20.0%).
The bank’s net profit before tax reduced by 12.1% to R183.9m in FY17, driven by rising credit losses and operational costs. Non-funded income relative to total operating income continued with the downward trajectory registering 39.6% for FY17 (FY16: 41.4%) maintaining pressure on the quality of the underlying earnings. The cost/income ratio rose to 65.2% for FY17 (FY16: 62.7%) largely due to increased investment in technology and compliance. Overall, the bank registered ROaE and ROaA of 11.6% and 1.5% at FY17 respectively.
The bank’s diversified funding and liquidity profile (comprising substantial debt raised from capital markets) has lengthened the funding pipeline. In 1H FY18, Sasfin issued R600m of securitised notes and secured an additional USD30m from Development Finance Institutions (“DFIs’) during the same period. Given the relatively shorter tenor of assets, the bank runs a positive cumulative asset/liability maturity profile. In addition, Sasfin maintains sound liquidity buffer evidenced by a Liquidity Coverage Ratio of 164% at FY17, well above the minimum prescribed ratio.
Material improvement in the asset quality and capitalisation metrics, coupled with improved earnings diversification, could trigger a positive rating action. A negative rating action may follow further weakening in asset quality, coupled with earnings pressure and deterioration in capitalisation and/or liquidity metrics.
|NATIONAL SCALE RATINGS HISTORY||INTERNATIONAL SCALE RATING HISTORY|
|Initial rating (May 2016)||Initial rating (May 2016)|
|Long-term: BBB+(ZA); Short-term: A1-(ZA)||Long-term: BB|
|Outlook: Stable||Outlook: Stable|
|Last rating (May 2017)||Last rating (May 2017)|
|Long-term: BBB+(ZA); Short-term: A1-(ZA)||Long term: BB-|
|Outlook: Stable||Outlook: Negative|
|Primary Analyst||Committee Chairperson|
|Simbarake Chimutanda||Mark Vrdoljak|
|Credit Analyst||Senior Structured Finance Analyst|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2017
South Africa Bank Statistical Bulletin (December 2017)
Sasfin rating report (2016-17)
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 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; c.) such ratings were an independent evaluation of the risks and merits of the rated entity; and d.) the validity of the ratings is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
Sasfin 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 Sasfin Bank Limited with no contestation of the ratings.
Information received from Sasfin Bank Limited and other reliable third parties to accord the credit ratings included:
- Audited financial results as at 30 June 2017 (and four years of comparative numbers);
- Group interim results at 31 December 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; and
- Industry comparative data.
The ratings above were solicited by, or on behalf of Sasfin 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||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.|
|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.|
|Diversification||Spreading risk by constructing a portfolio that contains different investments, 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.|
|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.|
|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.|
|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.|
|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.|
|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.|
For a detailed glossary of terms please click here
GCR affirms Sasfin Bank Limited’s rating of BBB+(ZA); Outlook Stable.