Announcements Financial Institutions Rating Alerts

GCR affirms the BBB-(BW)/A3(BW) ratings of African Banking Corporation Botswana; maintains Rating Watch Evolving.

Rating Action

Johannesburg, 8th November 2019 – GCR Ratings (“GCR”) has affirmed the BBB-(BW)/A3(BW) ratings of African Banking Corporation Botswana (“BancABC Botswana”, “the bank”). The outlook remains Rating Watch Evolving.

Rated Entity / Issue Rating class Rating scale Rating Outlook / Watch
African Banking Corporation Botswana Issuer Long Term National BBB-(BW) Rating Watch Evolving
Issuer Short Term National A3(BW) Rating Watch Evolving

On May 22 2019, GCR announced that it had released new criteria for all banks and bank-like entities. This methodology is titled Criteria for Rating Financial Institutions. As a result, the ratings were placed ‘Under Criteria Observation’.

Subsequently, on August 5 2019, GCR placed BancABC Botswana’s on Rating Watch Evolving in response to the announced, impending restructure of its parent, ABC Holdings Limited, involving an equity swap transaction with Equity Group Holdings Plc. GCR has now finalised the review of BancABC Botswana’s rating under the new methodology to the rating above stated.

Rating Rationale

The BBB-(BW)/A3(BW) national scale ratings on BancABC Botswana are restrained by the bank’s modest scale, just sufficient capitalisation, high funding concentrations and modest balance sheet liquidity. The ratings are supported by a positive risk position characterised by low credit losses, modest non-performing loans and just adequate loan loss reserving. The ratings also reflect an element of regulatory insulation from an inherently weaker group.

BancABC Botswana is the 5th largest bank by total assets market (9.3% share) operating in the oligopolistic Botswana banking sector. The bank’s business lines are moderately undiversified, with modest contributions from a relatively small insurance subsidiary. Less negatively, interest related income contributed c.76% to total operating revenues. Revenues are moderately stable, with a slight dip over the most recent year due a strained operating environment.

The risk position is a positive ratings factor. Credit losses have historically been good, averaging around 1% over the past few years, although it is worth nothing that IFRS9 had a significant impact on the bank in FY18, with an additional c.60% of provisions over non-performing assets raised as day one impact. Positively, non-performing loans have been largely flat despite a tight liquidity environment. Loan loss reserving is now considered to be adequate at around 90% coverage of stage 3 loans. Furthermore, the bank typically holds good levels of collateral with around 2.8x cover of top 20 non-performing loans. Positively, loan loss concentrations are low, with the top twenty loans accounting for c.18% of total loans at FY18.

Capital and earnings is a negative factor for the ratings. Despite a moderately good internal capital generation, averaging around 14% over five years, the bank’s capital position is confined by a somewhat aggressive dividend pay-out policy. The bank paid 40% of profit after tax as an interim dividend at June 2019. As a result, BancABC Botswana’s GCR total capital ratio at June 2019 was 12.9%. GCR assumes slight improvement in the capital metrics of the bank post the group restructuring.

Funding and liquidity is a negative factor for the ratings. The funding structure is characterised by concentrated term deposits (c.70% of total deposits) compared to market ratios at 60% term deposits/40% demand deposits and longer-term borrowings from developmental finance institutions, which have resulted in above market average cost of funding of c.4% (market average being c.2%). At 2019, the top twenty deposits accounted for 59.2% of total deposits. Deposits constituted around 88% of total funding at June 2019, with the rest being mainly lines of credit and other sources. Liquidity is considered to be just adequate, with liquid assets covering 17% of total deposits at June 2019, which has been a five-year historical average. Modest liquidity is, however, somewhat characteristic of the Botswana market.

We have factored into the ratings some regulatory insulation from the wider ABC Holdings Group (GCR risk score of 10), which we consider to be weaker than the Botswana operations. We have done so on a temporary basis, until the anticipated removal of group subsidiaries in the first half of 2020. If, post-merger, the Zimbabwean operations contribute a meaningful part of group risk or if the Botswana regulators have not the legal system or operational process to insulate the bank, the ratings on the Botswana bank could be negatively affected.

Rating Outlook

The Rating Watch Evolving reflects the anticipated changing nature of the wider group, through the expected equity swap transaction with Equity Group Holdings Plc. We anticipate that the group will sell some of its subsidiaries, improve its currently weak capital position, and become more concentrated in Botswana. At the same time, we expect the Zimbabwean operations to contribute less to the restructured group due to its rapidly devaluing local currency.

Rating Triggers

We could lower the ratings if group risks do not dissipate from the expected transaction detailed above. We could also lower the ratings if the bank’s GCR capital ratio goes below 10%, credit losses compare less well to the local market or if the liquidity deteriorates. Upwards potential of the bank’s rating is limited due to the risk of the group. However, presuming group risks dissipate, the rating may be uplifted on the back of material improvement in the capitalisation, funding structure and liquidity of the entity.

Analytical Contacts

Primary analyst Nyasha Chikwengo Financial Institutions Analyst
Johannesburg, ZA NyashaC@GCRratings.com +27 11 784 1771
Secondary analyst Kudzanai Samanga 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
LT & ST national scale ratings of ABC Holdings & BancABC Botswana placed on Ratings Watch Evolving, August 2019
GCR affirms ABC Holdings’ national scale rating of B(BW); maintains Ratings Watch Evolving, November 2019

Ratings History

African Banking Corporation Botswana

Rating class Review Rating scale Rating class Outlook Date
Issuer Long Term Initial National BBB- (BW) Positive June 2004
Last National BBB- (BW) Rating Watch Evolving August 2019
Issuer Short Term Initial National A3 (BW) N/A June 2004
Last National A3 (BW) Rating Watch Evolving August 2019

Risk Score Summary

Risk score
Operating environment 14.75
Country risk score 9.25
Sector risk score 5.5
Business profile -1.0
Competitive position -1.0
Management and governance 0.0
Financial profile -1.0
Capital and Leverage -1.0
Risk 0.5
Funding structure and Liquidity -0.5
Comparative profile 0.0
Group support 0.0
Government support 0.0
Peer analysis 0.0
Total Score 12.75
National Scale Rating BBB-(BW)/A3(BW)

Glossary

Capital The sum of money that is invested to generate proceeds.
Cash Funds that can be readily spent or used to meet current obligations.
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; and c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

The credit rating has been disclosed to BancABC Botswana. The ratings above were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating.

BancABC Botswana 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 BancABC Botswana and other reliable third parties to accord the credit rating included:

  • Audited financial results of BancABC Botswana as at 31 December 2018
  • Condensed consolidated unaudited financial statements as at 30 June 2019
  • A breakdown of facilities available and related counterparties
  • Industry comparative data


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