Johannesburg, 10 Jun 2014 — Global Credit Ratings has today downgraded the national scale ratings assigned to African Bank Limited to A-(ZA) and A2(ZA) in the long term and short term respectively; with the outlook accorded as Negative. Furthermore, Global Credit Ratings has downgraded the international scale rating assigned to African Bank Limited to BB+; with the outlook accorded as Negative.
SUMMARY RATING RATIONALE
Global Credit Ratings has accorded the above credit rating(s) to African Bank Limited based on the following key criteria:
African Bank Limited (“ABL”, “the bank”) is a dominant lender of unsecured credit to low- and middle-income consumers, and of secured furniture credit through furniture retailer Ellerines Holdings Limited (“Ellerines”). ABL and Ellerines are owned by listed African Bank Investment Limited (“ABIL”). The bank, with a net loan book of R48.4bn at 1H F14, posted substantial losses in F13 and 1H F14, despite positive top-line growth. Revenue grew 10% (annualised) in 1H F14 (F13: 18.3%) and net interest margins contracted by 140bps to 11.5% in 1H F14 (F13: 12.9%). Fee income contribution was flat and cost control was tight despite enhanced collections capacity. F13 top-line trends were overshadowed by c.90% growth in credit impairment charges and a 3.2x increase in net write-offs. Credit quality continued to deteriorate in 1H F14, with non-performing loans (“NPLs”) increasing to 30.6% of advances (F13: 27.3%), and NPL coverage rising from 63.6% to 80.3% (90% for the Ellerines loan book). Credit-related charges and R4bn in goodwill written off yielded losses of R4.5bn in F13 (1H F14: c.R2.2bn).
The bank’s poor credit performance follows regulatory concerns about the swift pace of unsecured lending growth and rising consumer stress. While declining debt affordability and retail spend on durable goods have dampened performance in the past 18 months, suboptimal underwriting decisions pre-July 2013 also contributed to the poor result as the majority of the loan book in F13 and 1H F14 was originated during this period. In July 2013, ABL tightened underwriting/collection procedures and changed provisioning policies. Thereafter, credit sales growth turned negative and loan book growth has slowed, amplifying NPLs.
Operational losses eroded statutory capital by R2.9bn in F13/1H F14, mitigated by ABIL’s R5.5bn rights issue in December 2013 (R4.8bn of which was injected into bank capital). At 1H F14, total capital adequacy of 26.4% approached the 2014 target (27%) but remains below the long-term target of 30%. Capital stress tests indicate that ABL has inadequate reserves in a moderate-high stress scenario; broadly, balance sheet metrics are acceptable, but high volatility in credit losses and earnings place capital at increased risk.
The group is expecting a challenging year. Consumer strain points to slow top-line growth and margin pressure. Existing provisions should protect earnings against unexpected NPLs. Higher funding costs are likely, reflecting increased risk and rising rates, whilst remedial action within the business may put upward pressure on costs.
A return to sustainable profitability coupled with slowing NPL formation would signal declining business risk, and be positively viewed. Any changes in South Africa’s sovereign rating could have an impact on the rating. More positive macroeconomic trends affecting consumer health would support improvement in ABL’s top line growth and profitability. Continued earnings volatility, deterioration in credit risk metrics (in particular NPL levels and write-offs), and diminished capital adequacy would put downward pressure on the ratings.
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The ratings above are unsolicited and accorded based on publicly available information.
|NATIONAL SCALE RATINGS HISTORY||INTERNATIONAL SCALE RATINGS HISTORY|
|Initial rating (Jun/2004)||Initial rating (Mar/2013)|
|Long term: A(ZA); Short term: A1(ZA)||Long term: BBB-|
|Outlook: Stable||Outlook: Stable|
|Last rating (Dec/2013)||Last rating (Dec/2013)|
|Long term: A(ZA); Short term: A1(ZA);||Long term: BBB-|
|Rating Watch||Outlook: Stable|
Senior Credit Analyst
Sector Head: Financial Institution Ratings
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
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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; c.) such rating Was an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
African Bank Limited did not participate in the rating process, though GCR is satisfied that the public information available was sufficient.
The credit rating/s has been disclosed to African Bank Limited with no contestation of the rating.
The information received from African Bank Limited and other reliable third parties to accord the credit rating(s) included African Bank Investment Limited’s 31 March 2014 interim financial results, African Bank Limited’s 30 September 2013 audited financial statements (plus three years of comparative numbers), banking sector information (as supplied in the BA900 Reserve Bank of South Africa reports) and consumer lending information (as supplied by the National Credit Regulator).
The ratings above were not solicited by, or on behalf of, the rated client, and therefore, GCR has not been compensated for the provision of the ratings.
GCR downgrades African Bank Limited’s rating to A-(ZA); Outlook Negative.