Johannesburg, 23 September 2016 — Global Credit Ratings has affirmed the national scale ratings assigned to ZB Bank Limited of BB-(ZW) and B(ZW) in the long-term and short-term respectively; with the outlook accorded as Stable. The ratings are valid until September 2017.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to ZB Bank Limited (“ZBBL”, “the bank”) based on the following key criteria:
The ratings of ZBBL reflect the challenges being faced in arresting asset quality stress in a weakening macroeconomic environment. Improvements in capitalisation and profitability are noted, and factored into bank’s long-term rating.
The bank is the flagship of ZB Financial Holdings Limited (“ZBFHL”, the “group”), which is in the process of consolidating its building society arm, ZB Building Society (“ZBBS”) into ZBBL. While the matters which were holding back the merger were recently resolved, the two entities are yet to be consolidated and as such the ratings accorded do not reflect the effects of the merger (which is expected to improve the bank’s credit profile).
Total regulatory capital grew 6.3x to USD56.3m between FYE14 and 1H F16, driven by a USD20m capital injection and return to profitability (with high earnings retention). Alongside a decline in risk weighted assets, the bank’s Tier 1 and total capital adequacy ratios increased to 25.3% and 26.2% at 1H F16 (FYE15: 21.3% and 22.3%; FYE14: 2.3% and 3.3%) respectively, returning to levels above the minimum regulatory requirements of 8% and 12% correspondingly.
Asset quality indicators improved, but remained weak in the period under review. Gross non-performing loans (“NPLs”) decreased by 52.5% to USD23.2m between FYE14 and 1H F16 due to increased focus on collections, but mainly aided by a disposal of USD18m NPLs to the Zimbabwe Asset Management Company (“ZAMCO1”). Nonetheless, despite declining somewhat, the bank’s gross NPL ratio remained high at 25.1% at 1H F16 (FYE14: 31.3%). Specific provisioning against NPLs increased to 26.0% (FYE14: 2.8%), while the net NPL to capital ratio decreased to 25.8% at 1H F16 (FYE14: 511.1%). Both ratios are still considered inadequate, given the high exposure of capital to delinquent loans. That said, a degree of comfort is derived from ZBBL’s measured risk appetite as indicated by its contracting loan book and reduced concentration risk.
Profitability recovered significantly in F15 and 1H F16, largely driven by a decrease in operating expenses following a cost rationalisation exercise which resulted in a significant reduction in the bank’s staff complement, coupled with a decline in impairment charges (due to the reduction in lending and recoveries on previously written off loans). The bank recorded net income of USD3.2m and USD4.6m in F15 and 1H F16 respectively, after posting a loss of USD6.8m in F14. Consequently, ZBBL’s ROaE and ROaA increased to an annualised 15.6% (F14: -20.8%) and 2.8% (F14: -2.5%) in 1H F16 respectively.
Liquidity risk has increased sector-wide due to domestic liquidity stress, increased appetite for hard currency by retail clients and the absence of a lender of last resort. ZBBL (together with all the banks in the market) has placed daily limits on ATM withdrawals and increased the provision of point of sale machines and transaction cards to manage its cash balances and liquidity position. Furthermore, the bank continues to maintain its liquidity ratio well above the statutory minimum of 30%, supported by the adoption of a cautious approach towards lending.
An upward movement in the bank’s ratings could arise from substantial and sustainable improvements in asset quality, solvency and profitability. A further deterioration in the bank’s credit profile, profitability and solvency indicators could negatively impact its ratings.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (August 2007)|
|Long-term: A(ZW); Short-term: A1-(ZW)|
|Outlook: Rating Watch|
|Last rating (September 2015)|
|Long-term: BB-(ZW) ; Short-term: B(ZW)|
|Primary Analyst||Committee Chairperson|
|Kuzivakwashe Murigo||Omega Collocott|
|Credit Analyst||Sector Head: Financial Institution Ratings|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2016
Zimbabwe Bank Statistical Bulletin (June 2016)
ZBBL rating reports (2007-15)
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, 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.
ZB 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 ZB Bank Limited with no contestation of the ratings.
Information received from ZB Bank Limited and other reliable third parties to accord the credit ratings included:
- Audited financial results as at 31 December 2015 (and three years of comparative numbers)
- Unaudited interim results at 30 June 2016
- Budgeted financial statements for 2016
- Latest internal and/or external audit report to management
- A breakdown of facilities available and related counterparties
- Corporate governance and enterprise risk framework
- Industry comparative data
The ratings above were solicited by, or on behalf of, ZB 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 SECTOR 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).|
|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|Building Society||A type of deposit-taking financial institution that engages in long-term mortgage lending, primarily to finance owner-occupied residential mortgages/property.|
|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.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|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.|
|Cost Ratio||The ratio of operating expenses to operating income. Used to measures a bank’s efficiency.|
|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.|
|Credit Rating Agency||An entity that provides credit rating services.|
|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.|
|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.|
|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.|
|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.|
|Liquidity Risk||The risk that a company may not be able to meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets. Regarding securities, the risk that a financial instrument cannot be traded at its market price due to the size, structure or efficiency of the market.|
|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.|
|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.|
|Regulatory Capital||The total of primary, secondary and tertiary capital.|
|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.|
|Under Review||Failure to carry out a full review of a rated entity within the designated timeframe, either through lack of information or delays in finalisation, i.e. review is ongoing.|
For a detailed glossary of terms utilised in this announcement please click here
GCR affirms ZB Bank Limited’s rating of BB-(ZW) ; Outlook Stable.