Announcements

GCR affirms Standard Bank of South Africa Limited’s rating of AA+(ZA); Outlook Stable.

Johannesburg, 23 May 2018 — 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 Stable.

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:

The ratings accorded to SBSA reflects its sustained credit profile (in an environment characterised by weak consumer and business confidence), underpinned by a strong competitive position, healthy capitalisation, and stable asset and liquidity profiles. The ratings also consider the systemic importance of SBSA, as the largest bank in South Africa (“SA”) by total assets and customer deposits, and its status as a key component of Standard Bank Group (“SBG”, “the parent”).

SBG’s position as the largest banking group by assets in Africa, supported by a 20.1% shareholding by Industrial and Commercial Bank of China, is a key rating consideration. Furthermore, SBSA retained its dominant position in the local market, claiming 23.8% (FY16: 25.3%) of the market share by assets and 22.8% (FY16: 23.1%) by customer deposits at December 2017.

SBSA maintained a strong capital buffer, registering a total capital adequacy ratio of 16.6% at FY17 (FY16: 15.3%; FY15: 14.7%), which was above the regulatory requirements. The bank’s strong capitalisation is underpinned by its substantial and diversified funding base reflected by a significant portion of subordinated debt of R16bn. In that regard, the bank registered a net stable funding ratio in excess of the minimum regulatory required of 100%.

SBSA’s loan portfolio continued to book healthy credit metrics, with the bank’s non-performing loan (“NPL”) ratio and specific provision coverage for NPLs stable at 3.5% and 45% respectively, since FY15. The credit loss ratio was maintained at 0.9% at FY17, with the static nature of the metrics a reflection of the sustenance of the credit risk management measures employed by SBSA.

The bank’s liquidity profile remained relatively stable, characterised by contractual mismatches in the assets/liability maturity profile. Nonetheless, liquidity coverage ratio increased to 98.2% (FY16: 96.4%), comfortably exceeding the regulatory minimum phase-in requirement of 80% in FY17. The bank’s liquid to total assets ratio improved from 11.2% at FY16 to 12.6%.

Pre-tax profit rose 11.7% to R21.7bn in FY17, supported mainly by net interest income which grew by 5% to R42bn. Notwithstanding this, the quality of the underlying earnings was maintained with more capital-light non-funded income representing 40.5% (FY16: 39.6%) of total operating income. The bank’s cost to income ratio remained somewhat steady at 58.6%. Overall, ROaE and ROaA increased to 16.3% and 1.3% (FY16: 15.2% and 1.1%) at FY17 respectively.

While the year 2017 was characterized by continuing political uncertainty and weakening consumer and business confidence, SA came out of technical recession in the second quarter. Furthermore, the political developments in Q4 2017 have introduced relative stability and policy predictability. SBSA’s international scale rating is limited by its exposure to the sovereign credit risk of South Africa

While upside ratings potential is viewed to be limited, SBSA’s credit profile would benefit from materially strengthened levels of capitalisation and liquidity, coupled with sustained bolstered earnings capacity.  However substantial deterioration in asset quality, earnings capacity and/or capital levels, as well as a weakened support floor could negatively affect the ratings. 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 2017)   Last rating (May 2017)
Long-term: AA+(ZA); Short-term: A1+(ZA)   Long-term (International LC): BB+
Outlook: Stable   Outlook: Negative

ANALYTICAL CONTACTS    
     
Primary Analyst
Simbarake Chimutanda
Credit Analyst

(011)784-1771
simbarakec@globalratings.net

  Secondary Analyst

Kudzanai Samanga

Junior Credit Analyst

(011)784-1771

kudzanais@globalratings.net

Committee Chairperson
Marc Chadwick

Sector Head: Insurance Ratings

(011) 784-1771
chadwick@globalratings.net

   
     

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Global Criteria for Rating Banks and Other Financial Institutions, updated March 2017

South Africa Bank Statistical Bulletin (December 2017)

SBSA rating reports (2001-17)

GCR’s South African Mapping table (May 2018)

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; c.) such ratings were 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 2017 (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.

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