Johannesburg, 12 July 2018 — Global Credit Ratings has downgraded the long term national scale rating of African Banking Corporation Tanzania Limited to BB-(TZ) from BB(TZ) and affirmed the short term national scale rating of B(TZ). The ratings have been placed on ‘Rating Watch’ and are expected to be reviewed by September 2018.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to African Banking Corporation Tanzania Limited (“BancABC Tanzania”, “the bank”) based on the following key factors:
The downgrade of BancABC Tanzania’s ratings from BB(TZ) to BB-(TZ) reflects its weak asset quality, insufficient reserve coverage, subdued operating performance, modest capitalisation and the significant reliance on interbank funding. The ratings are supported by ongoing shareholder support and currently appropriate levels of liquidity. Ratings have been placed on watch, to reflect the potential volatility in the funding profile (particularly interbank, public sector and pension funding). A negative rating action could follow a deterioration in funding, capital or liquidity. Ratings upside is unlikely, outside significant shareholder support that improves asset quality and repositions the funding structure.
Asset quality remained weak given the bank’s high volume of impaired loans (including the legacy TDFL loan), which are materially underprovided. As such, the gross non-performing loans ratio remained relatively stable, albeit elevated, equating to 30.7% at FY17 (FY16: 30.3%), underpinned by a relative slowdown in loan disbursements and substantial write offs. Furthermore, specific provisions coverage decreased to 32.9% of impaired loans at FY17 (FY16: 36.4%). We note the additional reserving required by the Bank of Tanzania, which has been included in statutory tier two capital. However, this only increases the provisioning coverage to 34.5% as at FY17.
The bank’s funding structure is reliant on potentially confidence sensitive and volatile deposits from other banks constituting 36.8% of total funding at FY17. Furthermore, at least 22.0% of customer deposits comprise public sector and pension funds deposits, which could potentially be withdrawn in line with the government’s directive for public institutions to bank with the Bank of Tanzania (“BoT”), and upon completion of a pension funds’ consolidation exercise.
In FY17, the bank recorded a loss after tax of TZS1.0bn, after being profitable in FY16 for the first time in our five-year review period. The loss is mainly attributable to a couple of extraordinary expenses which drove the growth of operating expenditure well above that of revenue growth. Resultantly, the bank recorded return on average equity of -0.1% (FY16: 0.8%) and return on average assets of -0.0% (FY16: 0.1%) at FY17.
Liquid and trading assets comprised 42.4% (FY16: 42.3%) of total assets at FY17, which provides adequate headroom to counter the liquidity risks associated with the short-term maturity structure of the bank’s funding. Additionally, BoT eased liquidity requirements for banks by reducing the minimum liquidity ratio from 10.0% to 8.0%, while allowing the bank’s ratios to fluctuate within predetermined ranges.
The bank’s capitalisation remained moderate, registering a risk-weighted capital adequacy ratio of 17.3% (FY16: 14.8%) at FY17, supported by the conversion of intercompany borrowings into preference shares. Recapitalisation was necessary in order for the bank to remain compliant with the regulatory minimum 12.0% and BoT’s directive to maintain a capital conservation buffer of 2.5%, with effect from August 2017.
A negative rating action could follow a deterioration in funding, capital or liquidity, while ratings upside is unlikely, outside significant shareholder support that improves asset quality and repositions the funding structure.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (November 2009)||Last rating (June 2017)|
|Long-term: BBB-(TZ); Short-term: A3(TZ)||Long-term: BB(TZ); Short-term: B(TZ)|
|Outlook: Negative||Outlook: Stable|
|Primary Analyst||Secondary Analyst|
|Simbarake Chimutanda||Nyasha Chikwengo|
|Credit Analyst||Credit Analyst|
|Sector Head: Financial Institution Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2017
BancABC Tanzania rating reports (2004-17)
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 process 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, security or financial instrument being rated; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
African Banking Corporation Tanzania 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 credit ratings have been disclosed to African Banking Corporation Tanzania Limited with no contestation of the rating.
The information received from African Banking Corporation Tanzania Limited and other reliable third parties to accord the credit ratings included:
- Audited financial results as at 31 December 2017 (and four years of comparative numbers);
- Unaudited management accounts up to 30 April 2018;
- Budgeted financial statements for 2018;
- Latest internal and/or external audit report to management;
- A breakdown of facilities available and related counterparties;
- Corporate governance and enterprise risk framework;
- Industry comparative data.
The ratings above were solicited by, or on behalf of, African Banking Corporation Tanzania Limited 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 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.|
|Audit Report||A written opinion of an auditor (attesting to the financial statements’ fairness and compliance with generally accepted accounting principles).|
|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|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||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 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.|
|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.|
|Diversification||Spreading risk by constructing a portfolio that contains different investments, whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.|
|Equity||Equity (or shareholders’ funds) is the holding or stake that shareholders have in a company. Equity capital is raised by the issue of new shares or by retaining profit.|
|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.|
|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||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.|
|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.|
|Margin||The rate taken by the lender over the cost of funds, which effectively represents the entity’s profit and remuneration for taking the risk of the loan; also known as spread.|
|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.|
|Provision||The amount set aside or deducted from operating income to cover expected or identified loan losses.|
|Rating Outlook||Indicates the potential direction of a rated entity’s rating over the medium term, typically one to two years. An outlook may be defined as: ‘Stable’ (nothing to suggest that the rating will change), ‘Positive’ (the rating symbol may be raised), ‘Negative’ (the rating symbol may be lowered) or ‘Evolving’ (the rating symbol may be raised or lowered).|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Risk Management||Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy.|
|Securities||Various instruments used in the capital market to raise funds.|
|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||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 2 Capital||Secondary capital is mainly made up of subordinated debt, portfolio impairment and 50% of any revaluation reserves and other specified regulatory deductions.|
For a detailed glossary of terms please click here.
GCR downgrades African Banking Corporation Tanzania Limited’s rating to BB-(TZ); Rating Watch.