Johannesburg, 23 September 2016 — 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 ratings are valid until September 2017.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to ZB Building Society (“ZBBS”, “the Society”) based on the following key criteria:
The ratings ZBBS are supported by its conservative risk appetite, but constrained by its comparatively small size, concerns regarding the absolute quantum of capital remaining below the statutory minimum, and the prevailing weak macroeconomic 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”, “the bank”). As such, the Society’s ratings are expected to be withdrawn after the completion of the merger with the bank. 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 would be expected to regularise ZBBS’s capital deficit).
ZBBS’s capital adequacy ratios have remained well above the regulatory minima, due to the low risk weights attached to housing loans which make up the majority of risk assets, coupled with the recent return to profitability and high earnings retention. Notwithstanding this, the Society’s core capital of USD15.9m at 1H F16 remained below the statutory minimum required capital of USD20m for building societies. The strategic initiative to merge the Society with the bank is aimed, in part, at regularising the capital deficit of ZBBS.
Asset quality came under pressure in the period under review, with the Society recording a 3.4x increase in non-performing loans (“NPLs”) between FYE14 and 1H F16. Although ZBBS’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 7.9% at 1H F16 from 2.2% at FYE14. Nonetheless, GCR takes comfort from the Society’s measured risk appetite and satisfactory provisioning. At 1H F16, ZBBS’s lower specific provisioning coverage ratio of 61.6% (FYE14: 112.7%) remained above the peer average of c.46%, while its net NPL to capital ratio stayed healthy at 1.1% at 1H F16 (FYE15: 0.6%; FYE14: 0.0%).
The Society returned to profitability in F15, recording net income of USD1.4m, (F14: USD1.0m loss). This was attributable to accelerating growth in net interest income, a substantial decrease in operating expenses (following a significant reduction in the Society’s staff complement) and impairment charges (due to a reduction in lending), as well as tax relief which resulted in a 92.0% decrease in tax charges. In 1H F16, pre-tax profits decreased by 34.5% year-on-year to USD0.7m owing to a decline in net interest revenue and non-interest income. ZBBS’s ROaE and ROaA increased to an annualised 7.7% (F14: -6.1%) and 3.1% (F14: -2.4%) in 1H F16 respectively.
Liquidity management has become increasingly pertinent, given the sector-wide liquidity stress, increased appetite for hard currency by retail clients and the absence of a lender of last resort. ZBBS (together with all the banking institutions in the market) has placed daily limits on ATM withdrawals, and increased the provision of point of sale (“POS”) machines and transaction cards to manage its cash balances and liquidity position. Furthermore, the Society’s liquidity position remains substantial, given its conservative investment approach.
The ratings could be positively impacted by the resolution of regulatory capital issues, improved profitability and the ability to pursue strategic goals, subsequent to the resolution of the pending merger. Ratings pressure could be exerted by failure to conclude the merger with the bank, and subsequent inability to raise capital to the prescribed levels, as well as reduced profitability and a diminished market profile.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (December 2002)|
|Long-term: BBB(ZW); Short-term: A2(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)
ZBBS rating reports (2002-15)
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 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 ratings have been disclosed to ZB Building Society with no contestation of the ratings.
Information received from ZB Building Society 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 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 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.|
|Credit Rating Agency||An entity that provides credit rating services.|
|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.|
|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.|
|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 Building Society’s rating of BB(ZW); Outlook Stable.