Johannesburg, 29 September 2017 — 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 2018.
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 accorded to ZBBS’ are underpinned by its strong risk-adjusted capitalisation metrics. However, the ratings also reflect the Society’s low market share, weak asset quality, volatile earnings, concerns regarding the absolute quantum of capital remaining below the statutory minimum, and the prevailing weak macroeconomic environment, which presents considerable liquidity and credit risks.
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”) pending the resolution of ongoing legal challenges. As such, the ratings accorded do not reflect the effects of the merger (which would be expected to regularise ZBBS’ capital deficit).
The Society’s capitalisation metrics have improved with ZBBS’ total regulatory capital increasing by 8.8% to USD17.2m in FY16, supported by a 9.8% increase in retained earnings. The Society’s Tier 1 and total capital adequacy ratios increased to 48.1% (FY15: 37.6%;) and 48.2% (FY15: 38.2%) at FY16 respectively. The Society’s core capital remains 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 deteriorated in FY16 mainly as a result of the weak economic environment. Gross non-performing loans (“NPLs”) increased to 8.0% of gross loans at FY16 (FY15: 6.5%). Specific provisions covered NPLs by 80.4% at FY16 (FY15: 69.3%), pre-collateral. NPLs net of specific provisions amounted to 1.5% of total regulatory capital at FY16 (FY15: 2.6%), pre-collateral.
The Society’s profitability declined in FY16 with a 36.7% decline from FY15 to record a net income of USD0.9m from USD1.4m in FY15. This was attributable to the introduction of interest rate caps, a slowdown in lending and a weak economic environment. ZBBS’ ROaE and ROaA decreased to 5.0% (FY15: 8.4%) and 2.0% (FY15: 3.1%) in FY16 respectively.
The Society had significant short-term maturity mismatches in its asset/liability profile (an industry structural feature), presenting a considerable amount of liquidity risk. Liquid and trading assets as a percentage of short-term deposits (<3 months) was 152.5% at FY16, declining to 120.1% at 1H FY17. Increased foreign currency shortages (affecting the entire sector) caused challenges in sufficiently meeting customers’ international payment obligations. The net advances to customer deposits ratio decreased from 93.4% to 70.3% at FY16 and decreased further to 53.0% at 1H FY17, as a result of a slowdown in loan creation given the increasingly tough operating environment.
The ratings could be positively impacted by the resolution of regulatory capital issues, improved profitability, asset quality and the ability to pursue strategic goals, subsequent to the resolution of the pending merger. Pressure on the ratings could be exerted by, failure to conclude the merger with the bank, subsequent inability to raise capital to the prescribed levels, as well as reduced profitability and a further deterioration in operating conditions.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (December 2002)||Last rating (September 2016)|
|Long-term: BBB(ZW); Short-term: A2(ZW)||Long-term: BB(ZW); Short-term: B(ZW)|
|Outlook: Rating Watch||Outlook: Stable|
|Primary Analyst||Committee Chairperson|
|Vimbai Muhwati||Kurt Boere|
|Credit Analyst||Senior Credit Analyst|
|(011) 784-1771||(011) 784-1771|
Junior Credit Analyst
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2017
ZBBS rating reports (2002-16)
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 2016 (and three years of comparative numbers)
- Unaudited interim results at 30 June 2017
- Budgeted financial statements for 2017
- 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.|
|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.|
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.