Johannesburg, 12 September 2019 – GCR Ratings (‘GCR’) has affirmed the long and short-term Zimbabwean national scale ratings of Central Africa Building Society (‘CABS’; ‘the society’) at A+(zw)/A1(zw) respectively. At the same time, the ratings have been taken off negative ratings watch and the outlook accorded as stable.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook / Watch|
|Central Africa Building Society||Long term issuer||National||A+(ZW)||Stable Outlook|
|Short term issuer||National||A1(ZW)|
On May 22, 2019 GCR announced that it had released new criteria for all banks and bank-like entities, titled Criteria for Rating Financial Institutions. As a result, the ratings were placed “Under Criteria Observation”. Subsequently, GCR has finalised the review under the new methodology. As a result, the ratings have been removed from ‘Under Criteria Observation’.
The A+(zw)/A1(zw) national scale ratings on CABS reflects the society’s strong market position and franchise in Zimbabwe and support provided by Old Mutual Zimbabwe Limited (‘OMZL’). The ratings are moderated by a modest capital position and an intermediate risk and funding and liquidity position.
The society ranked 3rd by total assets and deposits size with 11.0% and 11.3% market share at FY18 respectively, retaining its strong competitive position in the Zimbabwean market. Our positive assessment of CABS’ competitive position also reflects a relatively good business diversification, in a domestic context. For example, contribution to operating income was split between interest related sources (c.63%) and the rest from non-interest related sources at FY18.
Capital and earnings a negative factor for the ratings. Despite a strong internal capital generation of c.31% the society’s capital position is hamstrung by an aggressive dividend pay-out policy. CABS’ GCR total capital ratio at Dec. 31st 2018 was 14.2% but we expect it to improve to at least 15% next year. The earnings of the society are strong, with return on equity averaging c.23% over the past 3 years. The earnings are supported by an internal capital generation of c.31% for FY18.
The risk position is a neutral ratings factor. Credit losses (1.4% in FY18) have broadly outperformed the market over the past few years and non-performing loans have been improving, although the current harsh economic is expected to test this trend going forward. Loan loss reserving is just adequate at around 70% of stage 3 loans at FY18, but the society typically holds good levels of collateral. Positively loan concentrations are low, with the top twenty loans accounting for c.37.4% of total loans at FY18.
Funding and liquidity is a neutral ratings factor. The funding structure is stable and generally diversified. Retail and corporate deposits provide approximately 70% of total funds and money markets (often from the parent, which does create some concentration in the funding structure) making up the bulk of the remain funds. Liquidity is considered to be good. At FY18, liquid assets covered c.42% of total deposits.
The ratings of CABS are supported by an expectation of on-going financial and operational support from OMZL. CABS has been a strong and dependable source of dividends and interest income for the parent over the past few years. At FY18, CABS provided around 30% of OMZL profit before tax and represented around 20% of total assets.
The Stable outlook balances the ongoing volatility in the local economy, currency fluctuations and long-term political vulnerabilities with the strong market position, sustained earnings quality and support from its parent. CABS is also expected to reach 15% GCR capital ratio by half year 2020. We also factor in the society being able to successfully pass on its legacy USD liabilities to the Central Bank, at a rate of Zimbabwean $1to US$1.
The rating may improve on the basis of a material improvement in the society’s financial profile, most likely from a material improvement in the capitalisation of the entity. We could lower the ratings if capital doesn’t improve, asset quality deteriorates or if liquid assets shrink materially.
|Primary analyst||Simbarake Chimutanda||Financial Institutions Analyst|
|Johannesburg, ZA||simbarakec@GCRratings.com||+27 11 784 1771|
|Secondary analyst||Samanga Kudzanai||Financial Institutions Associate|
|Johannesburg, ZA||kudzanais@GCRratings.com||+27 11 784 1771|
|Committee chair||Matthew Pirnie||Sector Head: — Financial Institutions|
|Johannesburg, ZA||matthewp@GCRratings.com||+27 11 784 1771|
Related Criteria and Research
|Criteria for the GCR Ratings Framework, May 2019|
|Criteria for Rating Financial Institutions, May 2019|
|GCR Ratings Scale, Symbols & Definitions, May 2019|
|GCR Country Risk Scores, June 2019|
|GCR Financial Institutions Sector Risk Score, July 2019|
Central Africa Building Society
|Rating class||Review||Rating scale||Rating class||Outlook||Date|
|Issuer Long Term||Initial||National||A+ (zw)||Ratings Watch||October 2000|
|Last||National||A+(zw)||Rating Watch Negative||May 2019|
|Issuer Short Term||Initial||National||A1(zw)||n/a||October 2000|
|Last||National||A1(zw)||Rating Watch Negative||May 2019|
Risk Score Summary
|Country risk score||0|
|Sector risk score||1|
|Management and governance||0|
|Capital and Leverage||-0.5|
|Funding structure and Liquidity||0|
|Capital||The sum of money that is invested to generate proceeds.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|Credit Rating||An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.|
|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.|
|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.|
Salient Points 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; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
CABS 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 information received from CABS and other reliable third parties to accord the credit rating included:
- Audited financial results of CABS as at 31 December 2018;
- Management accounts as at 31 July 2019;
- Budgeted financial statements for 2019;
- Latest internal and/or external audit report to management;
- A breakdown of facilities available and related counterparties;
- Industry comparative data.