Johannesburg, 10 Jun 2015 – Global Credit Ratings has downgraded the national scale long term ratings assigned to African Banking Corporation (Moçambique) S.A. to BB+(MZ) and B(MZ) in the long term and short term respectively; with the outlook accorded as Stable. The rating(s) are valid until 06/2016.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating(s) to African Banking Corporation (Moçambique) S.A. (“BancABC Moçambique” and/or “the bank”) based on the following key criteria:
BancABC Moçambique’s ratings are constrained by deterioration in the quality of its loan book, high operating and funding costs, weak earnings performance amid significantly increased impairment charges, and a reduced capital buffer.
During F14, the bank’s parent company, ABC Holdings Limited, was acquired by Atlas Mara Limited. The new shareholders are expected to drive the group’s next growth phase and stronger inroads into the retail sector, as well as provide much needed operational, capital and funding support to its subsidiaries.
Regulatory capital grew by 9.9% to MZM848.1m at FYE14 mainly due to retained earnings growth. Notwithstanding this, the higher growth in risk weighted assets (“RWA”) led to a decline in the total risk weighted capital adequacy ratio to 9.3% at FYE14 (FYE13: 14.8%), against a regulatory minimum of 8%. The growth in RWA follows the introduction of Basel 2 in January 2014. Accordingly, banks are now required to allocate capital for market and operational risk.
Asset quality remains a challenge with gross impairments rising from 8.4% of gross loans at FYE13 to 12.1% at FYE14. The decline in asset quality was attributable to the downgrade of four large corporate exposures totalling MZM486m or 61.7% of total non-performing loans (“NPLs”) in F14. In addition, retail loan quality also suffered a setback, with NPLs almost doubling to MZM256.2m, following operational challenges at one of the bank’s group lending schemes in the coal mining sector, on the back of a decline in coal prices. However, the significant weight given to collateral, resulted in the loan loss provision coverage ratio dropping from 80.3% to 39.7% at FYE14. Consequently, the bank’s net NPLs increased to 7.7% (FYE13: 1.8%) and 51.4% (FYE13: 9.3%) of net loans and capital respectively. Arrears are more than fully covered after taking into account collateral. However, the reality of long time delays (cumbersome legal processes) and the costs involved with converting collateral into cash is considered a pressure point.
A pre-tax loss of MZM70.8m was recorded for F14, from a pre-tax profit of MZM50.7m in F13. Earnings performance was impacted by high impairment charges, high funding costs and growth in operating costs.
Although the structural makeup of the bank’s funding base remains an issue due to high depositor concentrations (individual and in aggregate) and an extremely short maturity structure, direct funding and liquidity risks are partly ameliorated by the high coverage of short-term funding by liquid and trading assets at 31.5% as at FYE14 (FYE13: 40.1%).
A positive earnings growth trend, while maintaining credit protection ratios, sound asset quality, strengthened capital and provision levels (to further enhance risk absorption capacity), and the success of strategic initiatives to diversify the funding profile and loan portfolio (on the back of the retail strategy), may have a positive impact on the ratings. A further weakening of earnings, and asset quality problems associated with inadequately controlled growth, weak credit administration, and a weak local and global economic outlook could see the ratings come under pressure.
NATIONAL SCALE RATINGS HISTORY
Initial rating (Dec/2004)
Long-term: BBB-(MZ); Short-term: A3(MZ)
Last rating (Jun/2014)
Long-term: BBB-(MZ); Short-term: A3(MZ)
Senior Credit Analyst
Sector Head: Financial Institution Ratings
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2015
BancABC Moçambique’s rating reports (2004-14)
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.
African Banking Corporation (Moçambique) S.A. participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit rating/s has been disclosed to African Banking Corporation (Moçambique) S.A. with no contestation of the rating.
- Audited financial results of the bank as at 31 December 2014
- Unaudited interim results of the bank as at 30 April 2015
- Five years of comparative numbers
- Budgeted financial statements for 2015
- Latest internal and/or external report to management
- Reserving methodologies
- A breakdown of facilities available and related counterparties
- Corporate governance and enterprise risk framework
- Industry comparative and regulatory framework
The ratings above were solicited by, or on behalf of, African Banking Corporation (Moçambique) S.A., 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 GLOSSARY
|Arrears||An overdue debt, liability or obligation. An account is said to be ‘in arrears’ if one or more payments have been missed in transactions where regular payments are contractually required.|
|Asset Quality||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 (i.e. being paid back in accordance with their terms) and the likelihood that they will continue to perform.|
|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.|
|Collateral||Asset provided to a creditor as security for a loan.|
|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.|
|Credit Rating Agency||An entity that provides credit rating services.|
|Credit Risk||The possibility that a bond issuer or any other borrowers (including debtors/creditors) will default and fail to pay the principal and/or interest when due.|
|Creditworthiness||An assessment of a debtor’s ability to meet debt obligations.|
|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.|
|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 Rate||The charge or the return on an asset or debt expressed as a percentage of the price or size of the asset or debt. It is usually expressed on an annual basis.|
|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||A 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||The national scale 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.|
|Non-Performing Loan||When a borrower is overdue, typically 90+ days in arrears or as defined by the lender, or in the transaction documents.|
|Off Balance Sheet||Off balance sheet items are assets or liabilities that are not shown on a company’s balance sheet. They are usually referred to in the notes to a company’s accounts.|
|Operational Risk||The risk of loss resulting from inadequate or failed internal processes, people or systems or from external events. This includes legal risk, but excludes strategic risk and reputational risk.|
|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.|
|Redemption||The repurchase of a bond at maturity by the issuer.|
|Regulatory Capital||The total of primary, secondary and tertiary capital.|
|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.|