Johannesburg, 31 May 2018 — Global Credit Ratings has downgraded the long-term national scale rating assigned to ABSA Bank Limited to AA(ZA) and affirmed the short-term national scale rating of A1+(ZA); with the outlook accorded as Stable. Furthermore, Global Credit Ratings has affirmed the international scale local currency rating assigned to ABSA Bank Limited of BB+; with the outlook accorded as Stable.
SUMMARY RATING RATIONALE1
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Absa Bank Limited (“Absa”, “the bank”) based on the following key criteria:
The downgrade of ABSA’s ratings reflect weakened implicit shareholder support. The very strong standalone credit profile is a reflection of consistently solid profitability, liquidity and capitalisation buffers, and the bank’s proven track record. Furthermore, the ratings also capture the challenging operating conditions, which expose ABSA to asset quality pressures, the bank’s moderating competitive position, and its high exposure to South African government securities, linking the bank’s credit profile to that of the sovereign.
ABSA is wholly owned by Barclays Africa Group Limited (“the group”, “BAGL”). At the end of December 2017, London-based Barclays Bank PLC (“Barclays”) had reduced its shareholding in the group to 14.9% from 62.3%. A decision was made to rebrand BAGL to ABSA Group Limited, subject to approval from regulators and shareholders. The group has until mid-2018 to remove Barclays from all company material in South Africa and mid-2020 to rebrand all Barclays operations. ABSA’s ratings have historically been supported by the profile and commitment of its parent. However, the reduction of its controlling stake in the group signals reduced commitment and ABSA’s limited strategic importance to Barclays.
The bank’s capitalisation improved with a reported total capital adequacy ratio of 16.9% at FY17 (FY16: 15.1%) remaining above the minimum regulatory requirement and board-approved target range. Total regulatory capital increased by 17.6% to R91.5bn at FY17 (FY16: R77.8bn). The implementation of IFRS 9, effective January 2018 is expected to have a financial impact on the current impairment provisioning levels albeit not expected to reduce the bank’s Tier 1 capital ratio by more than 35bps.
The bank maintained adequate liquidity buffers due to its stock of high quality liquid assets which increased by 7.5% in FY17. The bank maintained its Liquidity Coverage Ratio above regulatory requirements up to 111.6% at FY17 (FY16: 99.1%). ABSA is expected to remain committed to comply with the Net Stable Funding Ratio (effective 1 January 2018). The bank exhibits a strong and diversified funding base, in spite of negative liquidity gaps in the <6 month maturity buckets (a structural industry feature). The bank’s funding strategy is to grow its core deposit franchises in Retail and Business Banking and Corporate and Investment Banking, and to use wholesale funding to fund any contractual shortfall. ABSA targets an average contractual long-term funding ratio of between 24% and 27% in order to ensure that the bank’s liquidity risk remains within appetite.
ABSA’s continued relatively slow growth in loans and advances (4.5%) is in part a function of persistently challenging operating conditions, rising cost of funding, and low (albeit improving) confidence levels in South Africa. The bank’s gross non-performing loan and credit loss ratios (broadly in line with similarly-rated international peers) decreased to 3.5% and 0.7% at FY17 (FY16: 3.7% and 0.9%) respectively, due to lower levels of default in the wholesale portfolio and consistent risk mitigation strategies in the retail business.
The bank maintained a solid profitability profile despite the decline in ROE and ROA to 13% and 0.9% (FY16: 15.2% and 1.1%) respectively. The cost to income ratio increased to 63.1% (FY16: 56.4%), this is expected, given the rebranding and other expenses involved from the change in ownership. Costs are expected to normalise by 2020 after the rebranding.
While upside rating potential is viewed to be limited, ABSA’s credit profile would benefit from significant gain in market share, materially strengthened levels of capitalisation, and liquidity, coupled with sustained bolstered earnings capacity. The ratings will be sensitive to a substantial deterioration in asset quality, long-term earnings, liquidity and funding and/or capital levels, as well as a further weakening of the support floor. Furthermore, the international scale rating will be sensitive to changes in the sovereign rating of South Africa.
|NATIONAL SCALE RATINGS HISTORY||INTERNATIONAL SCALE RATINGS HISTORY|
|Initial rating (February 2000)||Initial rating (May 2013)|
|Long-term: AA-(ZA)||Long-term (International LC): BBB+|
|Short-term: A1+(ZA)||Rating outlook: Stable|
|Rating outlook: Stable|
|Last rating (May 2017)||Last rating (May 2017)|
|Long-term: AA+(ZA)||Long-term (International LC): BB+|
|Short-term: A1+(ZA)||Outlook: Negative|
|Senior Structured Finance Analyst|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2017
South Africa Bank Statistical Bulletin (December 2017)
Absa rating reports (2000-17)
GCR’s South African Mapping Tables (May 2018)
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.
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.|
|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.|
|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.|
|Downgrade||The assignment of a lower credit rating to a company or sovereign borrower’s debt by a credit rating agency. Opposite of upgrade.|
|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.|
|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.|
|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.|
|Liquid Assets||Assets, generally of a short term, that can be converted into cash.|
|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.|
|Maturity||The length of time between the issue of a bond or other security and the date on which it becomes payable in full.|
|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.|
|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.|
|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.|
|Securities||Various instruments used in the capital market to raise funds.|
|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.|
|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.|
|Tier 1 Capital||Primary capital consists of issued ordinary share capital, hybrid debt capital, perpetual preference share capital, retained earnings and reserves. This amount is then reduced by the portion of capital that is allocated to trading activities and other regulatory deductions.|
For a detailed glossary of terms please click here
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 ratings were based solely on the merits of the rated entity; c.) such ratings were an independent evaluation of the risks and merits of the rated entity; and d.) the validity of the ratings are for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
ABSA Bank Limited did not participate in the rating process, though GCR is satisfied that the public information available was sufficient.
The information used to analyse ABSA Bank Limited and accord the credit ratings included:
• Audited financial results as at 31 December 2017 (and four years of comparative numbers);
• Banking sector information (as supplied in the BA900 Reserve Bank of South Africa reports);
• Industry comparative data; and
• Other publicly available information.
The ratings above were unsolicited and accorded based on publicly available information.
GCR downgrades ABSA Bank Limited’s rating to AA(ZA); Outlook Stable.