Johannesburg, 29 May 2017 — Global Credit Ratings has affirmed the national scale ratings assigned to Standard Bank of South Africa Limited of AA+(ZA) and A1+(ZA) in the long term and short term respectively; with the outlook accorded as Stable. Furthermore, Global Credit Ratings has affirmed the international scale rating assigned to Standard Bank of South Africa Limited of BB+; with the outlook accorded as Negative.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Standard Bank of South Africa Limited (“SBSA”, “the bank”) based on the following key criteria:
SBSA’s ratings reflect its leading market position (being the largest bank in South Africa); resilient financial performance, despite challenging operating conditions; and its status as a systemically important bank. The ratings also factor in the bank’s improved capitalisation, robust risk management systems, stable profitability indicators, and conservative liquidity buffers. Offsetting these key rating strengths is South Africa’s slow economic growth, weaker political and institutional stability, and fragile investor confidence.
SBSA is a wholly owned subsidiary of the Standard Bank Group (“SBG”, “the group”). Its key status within SBG (Africa’s largest banking group by assets with a presence in 20 countries across sub-Saharan Africa), and a 20.1% shareholding in the group by Industrial and Commercial Bank of China (“ICBC”), the largest bank in the world by total assets, are key rating considerations.
The bank remains well capitalised, with a total capital adequacy ratio (excluding unappropriated profits) of 15.3% at FY16 (FY15: 14.7%; FY14: 14.6%), which was above the regulatory minimum of 10.4%. The increase in the bank’s capital adequacy ratio was due to weak loan book growth, while Tier 1 capital increased on the back of improved profitability and earnings retention. Notwithstanding this, IFRS 9, set to be implemented in 2018, is expected to lead to higher provisioning and earlier recognition of credit losses.
Asset quality metrics remained relatively stable in FY16, with the bank’s non-performing loan ratio and specific provision coverage ratio at 3.5% and 45% respectively for both FY15 and FY16. The credit loss ratio improved slightly to 0.9% at FY16 (FY15: 1.0%), primarily as a result of improvements in pricing for credit risk and enhanced recoveries.
Liquidity metrics were sound in FY16, with the Liquidity Coverage Ratio (“LCR”) increasing to 96.4% in FY16, exceeding the regulatory minimum phase-in requirement of 70%. This is primarily a result of the bank’s increasing exposure to high-quality assets such as government bonds and treasury bills. The bank appears on track to meet the LCR regulatory requirement of 100%, which becomes effective on 1 January 2019.
The bank’s total funding grew by 6.9% at FY16, primarily due to growth in deposits. The bank focused on altering its retail/ wholesale deposits mix to lower its cost of funding. GCR believes SBSA is committed to complying with the Net Stable Funding Ratio requirement, effective January 2018.
ROaE increased to 15.2% at FY16 (FY15: 14.4%), supported by a 12.8% increase in net interest income as the bank enjoyed the positive endowment effect of mismatching term of loans and liabilities, and hence the rising interest environment meant assets repriced faster than liabilities. Earnings also improved as the bank’s market shares in mortgage, vehicle and asset finance, and unsecured lending portfolios gained traction. However, the bank’s cost structure remains high relative to its peers with its cost-to-income ratio increasing to 59.4% at FY16 (FY15: 58.8%).
The bank’s fragile operating environment, together with sovereign linked risk, makes an upgrade unlikely in the short to medium term. However, the bank’s ratings could benefit from its ability to improve operational efficiencies and further diversify its income and funding sources. The ratings will be sensitive to a substantial deterioration in asset quality, earnings capacity and/or capital levels, as well as a weakened support floor. Furthermore, the bank’s international scale rating will be sensitive to changes in the sovereign rating of South Africa.
|NATIONAL SCALE RATINGS HISTORY||INTERNATIONAL SCALE RATING HISTORY|
|Initial rating (June 2001)||Initial rating (May 2013)|
|Long-term: AA(ZA); Short-term: A1(ZA)||Long term (International LC): BBB+|
|Outlook: Stable||Outlook: Stable|
|Last rating (May 2016)||Last rating (May 2017)|
|Long-term: AA+(ZA); Short-term: A1+(ZA)||Long-term (International LC): BB+|
|Outlook: Stable||Outlook: Negative|
Sector Head: Financial Institutions Ratings
Junior Credit Analyst
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2017
South Africa Bank Statistical Bulletin (December 2016)
SBSA rating reports (2001-16)
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; c.) such rating was an independent evaluation of the risks and merits of the rated entity; and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
The ratings above are unsolicited and accorded based on publicly available information.
Standard Bank of South Africa Limited did not participate in the rating process, though GCR is satisfied that the public information available was sufficient.
The information used to analyse Standard Bank of South Africa Limited and accord the credit ratings included:
- Audited financial results as at 31 December 2016 (and four years of comparative numbers);
- Banking sector information (as supplied in the BA900 Reserve Bank of South Africa reports);
- Industry comparative data; and
- Other publicly available information.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S FINANCIAL INSTITUTIONS SECTOR GLOSSARY
|Amortisation||From a liability perspective, the paying off of debt in a series of instalments over a period of time. From an asset perspective, the spreading of capital expenses for intangible assets over a specific period of time (usually over the asset’s useful life).|
|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.|
|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.|
|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.|
|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.|
|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.|
|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.|
|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.|
|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.|
|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.|
|Sovereign Risk||The risk of default by the government of a country on its obligations.|
|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 detailed glossary of terms please click here
GCR affirms Standard Bank of South Africa Limited’s rating of AA+(ZA); Outlook Stable.