Johannesburg, 29 May 2015 — Global Credit Ratings has downgraded the national scale long term rating assigned to African Banking Corporation of Zimbabwe Limited to BBB-(ZW) and affirmed the national scale short term rating of A3(ZW); with the outlook accorded as Negative. The rating(s) are valid until 05/2016.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating(s) to African Banking Corporation of Zimbabwe Limited (“BancABC Zimbabwe” and/or “the bank”) based on the following key criteria:
BancABC Zimbabwe’s ratings are constrained by deterioration in the quality of its loan book, which appears underprovided; an illiquid balance sheet (constraining its risk absorption capacity); and poor earnings performance amid significantly increased impairment charges (exacerbated by increasingly challenging operating conditions).
The acquisition of a significant interest in ABC Holdings Limited (“ABCH”) by Atlas Mara Limited (“Atlas Mara”) is expected to provide much needed capital and liquidity/funding support to the bank.
Following Atlas Mara’s acquisition of ABCH, the bank’s board of directors is currently being reconstituted, while notable changes in key management positions have also taken place. The new executive/senior management team will be influential in growing the business in line with the new shareholder’s vision/strategy.
A full-scope onsite review of the bank’s “CAMELS” carried out by the Reserve Bank of Zimbabwe in May 2014 revealed a “fair” rating of the bank’s overall condition, a downgrade from the “satisfactory” rating awarded in the previous review conducted in December 2008.
The gross non-performing loan ratio worsened to 23.5% at FYE14 (FYE13: 13.3%), largely due to the bank reclassifying several loan accounts, and weaker collection experience given the stressed consumer environment.
While in previous years the bank was in a capital accumulation cycle, in F14 the negative credit trend required substantial increases in provisioning levels and bad debt write-offs, which eroded the bank’s ability to retain earnings. That said, the bank’s core capital declined by 20.7% to USD56.1m at FYE14 (still well above the regulatory minimum requirement of USD25m). Consequently, the bank’s capital adequacy ratio decreased from 16.8% (F13) to 14.1% (F14), against the statutory requirement of 12%.
Amid high funding costs (given that the bank is largely funded by expensive wholesale deposits) and elevated bad debt charges, the bank posted an after-tax loss of USD1.4m, a substantial decline from its after-tax profit of USD14.2m in F13.
Given its declining deposit base, large negative liquidity gaps and low levels of liquid assets, the bank’s liquidity risk is heightened.
Given the negative rating outlook and the challenging operating environment, there is currently limited upside rating potential. The bank’s ratings will be sensitive to further deterioration in asset quality, long-term earnings (leading to a weakened buffer to counter the inherent risk in its business model) and the bank’s inability to meet the regulatory capital and/or liquidity requirements.
NATIONAL SCALE RATINGS HISTORY
Initial rating (Dec/2004)
Long term: BBB-(ZW); Short term: A3(ZW)
Last rating (May/2014)
Long term: BBB(ZW); Short term: A3(ZW)
Sector Head: Financial Institution Ratings
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2015
Zimbabwe Bank Statistical Bulletin (December 2014)
BancABC Zimbabwe rating reports (2004-14)
RATING LIMITATIONS AND DISCLAIMERS
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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; and c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
African Banking Corporation of Zimbabwe Limited 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 of Zimbabwe Limited with no contestation of the rating.
The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.
The information received from African Banking Corporation of Zimbabwe Limited and other reliable third parties to accord the credit rating/s included the 31 December 2014 audited annual financial statements (plus four years of comparative numbers), latest internal and/or external report to management, 2014 and 2015 budgeted financial statements, 30 April 2015 management accounts, corporate governance and enterprise risk framework, reserving methodologies, capital management policy, industry comparative data and regulatory framework, and a breakdown of facilities available and related counterparties.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S FINANCIAL INSTITUTIONS GLOSSARY
|Asset||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|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.|
|Bad Debt||A bad debt is an amount owed by a debtor that is unlikely to be paid due, for example, to a company going into liquidation. There are various technical definitions of what constitutes a bad debt, depending on accounting conventions, regulatory treatment and the individual entity’s own provisioning and write-off policies.|
|Balance Sheet||Also known as a Statement of Financial Position. A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been financed.|
|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|CAMEL||The acronym for the mainstream approach to credit analysis of financial institutions, referring to the five core elements of any credit assessment: Capital Adequacy, Asset Quality, Management (Competency), Earnings (Profitability) and Liquidity (Funding).|
|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.|
|Corporate Governance||Corporate governance broadly 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||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.|
|Downgrade||The assignment of a lower credit rating to a company or sovereign borrower’s debt by a credit rating agency. Opposite of upgrade.|
|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.|
|Illiquid||Markets or financial instruments are described as being illiquid if there are few buyers and sellers. Assets may also be considered illiquid. It may be difficult, or even impossible, to find a reliable price for an illiquid security.|
|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.|
|Income Statement||A summary of all the expenditure and income of a company over a set period.|
|Inherent Risk||Inherent risk is the product of the impact of the risk on the objective(s) and the likelihood of the risk occurring should no management actions/controls be in place to mitigate the risk.|
|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.|
|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.|
|Liabilities||All financial claims, debts or potential losses incurred by an individual or an organisation.|
|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||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.|
|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.|
|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.|
|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.|
|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||A short term rating is an opinion of an issuer’s ability to meet all financial obligations over the upcoming 12 month period, including interest payments and debt redemptions.|
|Write-off||The total reduction in the value of an asset.|