Johannesburg, 30 November 2018 — Global Credit Ratings has affirmed Steward Bank Limited’s long-term and short-term national scale ratings of BBB(ZW) and A3(ZW), respectively; with the rating placed on Negative Rating Watch.
SUMMARY RATINGS RATIONALE
Global Credit Ratings (‘GCR’) has accorded the above credit ratings to Steward Bank Limited (“Steward Bank” or “the bank”) based on the bank’s strong capitalisation, supported by good levels of internal capital generation, and ongoing group support with a weak risk position, funding concentrations and its modest market share. The Negative Rating Watch reflects our expectation of a broad negative impact on the Zimbabwean economy and the banking sector. This follows monetary and fiscal policy reforms announced under the Transitional Stabilisation Programme by the relevant authorities on the 5th of October 2018. Furthermore, we are monitoring the level of shareholder support post an anticipated demerger of the bank from its parent. Should the ongoing shareholder support decrease, a negative impact on the bank may likely occur.
The bank registered a Tier 1 ratio of 52.0% at 1H19 (FY18: 60.9%), well above the regulatory minimum of 12.0%. However, financial leverage of the bank is slightly less positive, with equity to total assets (on and off-balance sheet) of 12.5% at 1H19. Nevertheless, capitalisation is considered to be strong and is expected to be sustained over the rating horizon, underpinned by sound internal capital generation and a contracting loan book.
We consider the bank to be of moderate strategic importance to Econet Wireless Zimbabwe Limited (“EWZL”). The Zimbabwe based telecommunications group owns 100% of the bank and provides 54.5% of the bank’s funding base. However, the bank provides only c.12% of total group revenues and does not share the branding of the wider group. EWZL has recently announced plans to spin off its financial service lines, Steward Bank included, to create a new and separately listed entity called Cassava SmarTech Zimbabwe Limited. In light of this, GCR will be monitoring Steward Bank’s ratings for potential reduction in the level of shareholder support post the demerger.
Steward Bank’s risk position is considered to be inadequate, characterised by a track record of weak asset quality and increased operational risks arising from fast growth. The bank’s non-performing loans ratio improved to 5.2% at 1H19 from 12.2% at FY18 (FY17: 10.4%), on the back of a contracting loan book and aggressive write offs. The bank has written off 22.7% of loans over the last 18 months. Furthermore, the cost of risk has been volatile for the bank. New loan loss provisions to average customer loans ratio rose to 12.6% at FY18 (FY17: 8.6%) and there has been net recoveries in last six months, albeit including movement from regulatory reserves. Positively, the bank is now providing sufficiently for expected loan losses.
GCR perceives higher operational risk, mainly associated with technological and human capital capacities, due to the bank’s fast-growing pace. While the bank has since upgraded its technological platforms and upskilled its human resources, we cannot discount the reoccurrence of capacity challenges the bank faced during the period under review.
Funding is considered to be stable, with customer deposits contributing 99.5% to the funding base at FY18 (FY17: 99.8%). Cost of funds were contained below 1.0% over the review period. However, relatively weak diversification is noted within the bank’s deposit book due to a large single name/ group exposure which represented around 50% of total funds. Liquidity is considered to be adequate, supported by broad liquid assets coverage of short-term wholesale funding of 191.2x at FY18 (FY17: 380.6x).
Steward Bank is a tier 2 bank operating in the competitive Zimbabwean banking sector. However, its market position improved significantly relative to peers over the period under review, with market share increasing to 4.9% at FY18 (FY17: 2.8%). Cognisant of the bank’s limited geographical diversification relative to peers, we are of the opinion that Steward Bank’s competitive advantage in digital technology will continue to position it as one of the fastest growing banks over the next 12 months.
A negative rating action could follow weakening shareholder support and/or a deterioration in financial leverage. The Negative Rating Watch also reflects our concerns regarding the stability of the Zimbabwean economy and the banking sector as a whole. Upside rating potential is limited, outside a substantial improvement in the macroeconomic environment.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (September 2005)||Last rating (October 2018)|
|Long-term: BB-(ZW); Short term: B(ZW)||Long term: BBB(ZW); Short term: A3(ZW)|
|Rating Watch: Yes||Negative Rating Watch|
|Primary Analyst||Secondary Analyst|
|Vimbai Muhwati||Nyasha Chikwengo|
|Credit Analyst||Credit Analyst|
|(011) 784-1771||(011) 784-1771|
|Sector Head: Financial Institution Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions (March 2017).
Steward Bank rating reports (2005-17).
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 rating process 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, security or financial instrument being rated; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
Steward 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 Steward Bank Limited.
Information received from Steward Bank Limited and other reliable third parties to accord the credit ratings included:
- Audited financial results as at 28 February 2018 (and four years of comparative numbers)
- Unaudited half year financial results as at 31 August 2018
- Budgeted financial statements for 2019
- Latest external auditor’s report to management
The ratings above were solicited by, or on behalf of, Steward 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).|
|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.|
|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.|
|Customer Deposit||Cash received in exchange for a service, including safekeeping, savings, investment, etc. Customer deposits are a liability in a bank’s books.|
|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.|
|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.|
|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.|
|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.|
|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.|
|Net Profit||Trading/operating profits after deducting the expenses detailed in the profit and loss account (including taxes).|
|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 Watch||Indicates that a rating is under review for possible change in the short term and the movement may be either positive or negative.|
|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.|
|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.|
|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.|
|Stock Exchange||A market with a trading-floor or a screen-based system where members buy and sell securities.|
|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 Steward Bank Limited’s rating of BBB(ZW); Negative Rating Watch.