Johannesburg, 22 November 2019 – GCR Ratings (‘GCR’) has assigned Grobank Limited South African national scale ratings of BBB-(ZA)/A3(ZA) in the long and short-term respectively, with outlook accorded as Negative
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook / Watch|
|Grobank Limited||Issuer Long Term||National||BBB-(ZA)||Negative Outlook|
|Issuer Short Term||National||A3(ZA)||–|
The ratings on Grobank Limited (‘the bank’), previously South African Bank of Athens ‘SABA’, are anchored on the operating environment of South Africa, and balance the bank’s relatively modest market position, modest levels of capitalisation, expected forward looking good risk position, and structurally modest funding with adequate liquidity.
We consider the competitive positioning of Grobank to be a relative strain to the rating, given its small and niche business focus in comparison to the large and diverse top tier banks operating in South Africa. The bank’s strategy under its new shareholders will be to focus on food and agribusiness financing, and growing its retail and business franchise to broaden cheaper funding sources. We expect the bank to make losses for the next 18months, as it builds scale and deals with some of the legacy issues for the SABA operations. However, given the size of the Agri-economy, the strong capacity building of the bank, and the owners’/ managers’ strong links into the market, we expect the market position of the bank to be bolstered quickly.
We view capitalisation to be a ratings weakness due to poor earnings, and fairly tight capital management by the shareholders. This view is supported by the GCR capital ratio of 15%, which is based on 9 months financials for the year 2019. We expect the bank to continue to make losses, increase operational expenditure and grow assets over the next 12-18 months. However, this impact is expected to be mollified by meaningful shareholder injections over the next few years. Overall, we factor into our ratings the opinion that capital will be managed at a minimum 15% level over the rating horizon.
The risk position is a positive ratings factor for the bank. Asset quality has improved over the past 3 years, with NPLs recovering to normalised levels towards the end of 2019. Once the legacy book has been run down, we expect credit losses to compare well to rated peers, supported by the bank’s well controlled risk management, strong knowledge of the Agri-sector and highly collateralised lending. This is important because single name and industry concentrations are likely to be higher than domestic banks. We currently view market and foreign currency risks to be minimal.
Our slightly negative view on funding and liquidity is restrained by the high degree of confidence sensitive funding and somewhat high concentrations, with top 20 deposits accounting for 60% of total funds at 1H19. We expect funding sources to remain concentrated over the next 12-18 months, however with gradual improvements as the bank grows its retail business. These risks are mitigated by the bank’s adequate liquidity position, with the bank registering regulatory liquidity coverage ratio of 369%, including a R1bln stress funding facility provided by the shareholders.
The outlook is negative. We expect the bank to scale up at a quicker rate than traditional start-ups, which is expected to lead to a rapid growth in loans and assets. We also expect the bank to continue making losses over the next 12-18months. These combined factors will pressurise capitalisation, unless the shareholders inject enough capital to support the above, whilst simultaneously scaling up operations. We also factor in a gradual improvement in the funding structure, alongside the continued liquidity support by the shareholders. Credit losses are expected to be lower than the sector average, potentially excluding any legacy loan book effects.
The ratings could be lowered if capitalisation weakens below the 15% level, which is likely to require material shareholder support over the next 2years. We could also lower the ratings if the funding structure doesn’t improve over the longer-term (12-18months) or if credit losses exceed our expectations.
|Primary analyst||Simbarake Chimutanda||Financial Institutions Analyst|
|Johannesburg, ZA||SimbarakeC@GCRratings.com||+27 11 784 1771|
|Committee chair||Matthew Pirnie||Sector Head: Financial Institution Ratings|
|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, October 2019|
|Rating class||Review||Rating scale||Rating class||Outlook||Date|
|Issuer Long Term||Initial/last||National||BBB-(ZA)||Negative||November 2019|
|Issuer Short Term||Initial/last||National||A3(ZA)||–||November 2019|
Risk Score Summary
|Country risk score||7.5|
|Sector risk score||8.0|
|Management and governance||0.0|
|Capital and Leverage||-1.5|
|Funding structure and Liquidity||-0.5|
|Capital||The sum of money that is invested to generate proceeds.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|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 ratings were influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; 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 Grobank Limited. 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.
Grobank 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 information received from Grobank Limited and other reliable third parties to accord the credit rating included:
- Unaudited 9 months financial results of Grobank Limited as at 30 September 2019;
- Five year forecast and strategy of the bank;
- Latest internal and/or external audit report to management;
- Industry comparative data.