Johannesburg, 28 Sep 2015 — Global Credit Ratings has affirmed the national scale ratings assigned to ZB Building Society of BB(ZW) and B(ZW) in the long term and short term respectively; with the outlook accorded as Stable. The rating(s) are valid until September2016.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating(s) to ZB Building Society (“ZBBS” and/or “the Society”), based on the following key criteria:
The ratings of ZBBS are supported by the relatively low risk profile inherent in its core mortgage finance business, but constrained by its comparatively small size, concerns regarding the absolute quantum of capital remaining below the statutory minimum, and the weak operating environment.
ZBBS is a subsidiary of ZB Financial Holdings Limited (“ZBFHL”, the “group”), which is in the process of consolidating the Society into its banking arm, ZB Bank Limited (“ZBBL” and/or “the bank”). As such, the Society’s ratings are expected to be withdrawn once ZBBS is merged with the bank. However, the merger and its timing remain uncertain, as the conclusion of the process continues to depend on regulatory approval and the resolution of certain legal issues, which have been subject to multiple delays. To this end, the ratings accorded do not reflect the effects of the merger (which would be expected to regularise ZBBS’s capital deficit).
Due to the low risk weights attached to housing loans, which make up the majority of risk assets, ZBBS’s capital adequacy ratios remain well above the regulatory minima. Notwithstanding this, the Society’s core capital of USD15.2m at 1H F15 was below the statutory required minimum capital of USD20m for Tier II building societies. The strategic initiative to merge the Society with the bank is aimed, in part, at regularising the capital deficit of ZBBS. However, GCR notes that if this does not transpire, the Society will need to approach its shareholders for capital.
In a trend seen across the sector, ZBBS’s asset quality came under pressure in the period under review, with the Society recording a 2.3x increase in non-performing loans (“NPLs”) between FYE13 and 1H F15. While the Society’s credit quality continues to be supported by the low default risk on housing loans, the increase mainly stemmed from its deposit-backed consumer loan book which was affected by a weaker credit environment. The Society’s gross NPL ratio rose to 5.0% at 1H F15 from 2.3% at FYE13. However, GCR notes that this was well below the banking sector industry average of 13.2%. Furthermore, the Society’s asset quality is still considered satisfactory, given the high specific provisioning coverage ratio (of 70.0%) at 1H F15 (FYE14: 112.7%) and healthy solvency as indicated by the low net NPLs to total capital ratio of 1.9% at 1H F15.
The Society incurred a loss of USD1m in F14 as a result of a rise in impairment costs and a substantial increase in operating expenditure. The latter was driven by once off staff retrenchment costs. Nonetheless, ZBBS returned to profitability in 1H F15, posting a pre-tax profit of USD1.0m, supported by an improved net interest margin and a reduction in the cost base.
Liquidity is comfortable. A gap analysis of assets and financial liabilities reveals positive gaps for maturities extending beyond 12 months, which minimises liquidity risk. In addition, the Society maintains its liquidity ratio well above the statutory minimum of 20% for building societies.
A positive change in the Society’s ratings would be premised on the resolution of regulatory capital issues, improved profitability and the ability to pursue strategic goals, subsequent to the resolution of the pending merger. The failure to conclude the merger with the bank, and subsequent inability to raise capital to the prescribed levels would put downward pressure on the Society’s ratings. In addition, reduced profitability resulting from a rising cost base/allocation, diminished market profile, or the negative operating environment would lead to a negative change in ZBBS’s ratings.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (December 2002)|
|Long term: BBB(ZW); Short term: A2(ZW)|
|Outlook: Rating Watch|
|Last rating (February 2015)|
|Long term: BB(ZW); Short term: B(ZW)|
|Outlook: Rating Watch|
|Primary Analyst||Committee Chairperson|
|Kuzivakwashe Murigo||Jennifer Mwerenga|
|Credit Analyst||Senior Credit Analyst|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2015
Zimbabwean Bank Statistical Bulletin (June 2015)
ZBBL rating reports (2002-14)
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 Building Society 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 rating/s has been disclosed to ZB Building Society with no contestation of the rating/s.
Information received from ZB Building Society and other reliable third parties to accord the credit rating(s) included:
- Audited financial results as at 31 December 2014 (and three years of comparative numbers)
- Unaudited interim results at 30 June 2015
- Budgeted financial statements for 2015
- 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 Building Society, 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||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 (i.e. being paid back in accordance with their terms) and the likelihood that they will continue to perform.|
|Audit Report||An audit report is 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.|
|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 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||Corporate governance broadly 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||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.|
|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.|
|Creditworthiness||An assessment of a debtor’s ability to meet debt obligations.|
|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.|
|Exchange||A standardised marketplace in which different assets are traded.|
|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 Rate||The charge or the return on an asset or debt expressed as a percentage of the price or size of the asset or debt. It is usually expressed on an annual basis.|
|International Scale Rating||ISRs relate to either foreign currency or local currency commitments, assessing the capacity of an issuer to meet these commitments using a globally applicable (and therefore internationally comparable) scale.|
|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.|
|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.|
|Margin||The rate taken by the lender over the cost of funds, which effectively represents the entity’s profit and remuneration for taking the risk of the loan; also known as spread.|
|National Scale Rating||The national scale 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 Interest Margin||Net interest margin is the net interest income divided by average interest earning assets.|
|Non-Performing Loan||When a borrower is overdue, typically 90+ days in arrears or as defined by the lender, or in the transaction documents.|
|NPL Ratio||The ratio of non-performing loans and advances to total gross loans and advances, expressed as a percentage.|
|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.|
|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.|
|Shareholder||An individual, entity or financial institution that holds shares or stock in an organisation or company.|
|Short Term||Current; ordinarily less than one year.|