Johannesburg, 19 Jun 2015 – Global Credit Ratings has today downgraded the national scale long term rating assigned to African Banking Corporation (Tanzania) Limited to BB(TZ) and affirmed the national scale short term rating of B(TZ); 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 (Tanzania) Limited (“BancABC Tanzania” and/or “the bank”) based on the following key criteria:
While the deterioration in credit metrics, poor earnings performance and the prospect of continued losses (although breakeven is expected in F16) are leading factors constraining BancABC Tanzania’s ratings, the recent capital injections, turnaround strategy and key management changes at the bank (spearheaded by shareholders), although untested, have placed the bank in a position to gradually recover.
During F14, the bank’s parent company, ABCH Holdings Limited (“ABCH” and/or “the group”), was acquired by Atlas Mara Limited (“Atlas Mara”). 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.
The bank has regularised its capital position in line with a corrective order issued by the Bank of Tanzania (“BoT” and/or “central bank”) in 2014, directing the bank to remedy its breach of minimum regulatory capital adequacy ratios by October 2014. During 4Q F14, Atlas Mara injected TZS34.8bn (USD20m) Tier 1 capital into the bank through its parent, ABCH. The injection was classified as an “advance towards share capital” pending finalisation of the capitalisation process and was therefore not included in capital adequacy computations at FYE14. Consequently, capital adequacy indicators were still below the regulatory minima at FYE14. An additional TZS12.2bn (USD7m) Tier 1 capital was injected in February 2015. Post the finalisation of the capitalisation process, the bank reported Tier 1 and total risk weighted capital adequacy (“CAR”) ratios of 15.1% and 15.7% at 30 April 2015 respectively, based on monthly returns submitted to the central bank.
Asset quality deteriorated sharply, with total gross non-performing loans (“NPLs”) amounting to 36.5% of gross loans at FYE14 (FYE13: 5.0%). The growth in arrears was mainly driven by the downgrade of a large exposure to the Tanzania Development Finance Company Limited, representing 60.4% of impaired loans at FYE14. Notwithstanding this, a loan clean-up exercise in F14 saw the reclassification to NPLs of a number of exposures to both corporates and retail borrowers. Arrears coverage declined to 55.9% at FYE14 from 212.0% at FYE13. Consequently, net NPLs amounted to 26.9% (FYE13: 1.7%) of capital, pre-collateral at FYE14. While provisions are raised after taking into account expected recoveries on NPLs, the realisation of security and loan recovery has proved problematic in Tanzania due to the weak judicial system.
The bank’s operating loss escalated to TZS36.1bn in F14 (F13: TZS5.1bn loss), largely affected by elevated provisions, as well as high operating costs and lower non-interest income (foreign exchange dealing and trading securities) due to low transaction volumes.
The ‘Stable’ outlook is a reflection of the steps being taken to drive the recovery in operating performance and asset quality metrics, and to maintain and build capital. Appropriate deployment of capital/funding, a positive earnings trend (while maintaining credit protection factors), the diversification of income streams, and a reduction in funding costs (on the back of the retail strategy) may have a positive impact on the ratings. However, continued pressure on profitability from rising credit costs, persistent losses, the deterioration of liquidity and capital metrics in tandem with an escalation of losses from the loan portfolios, and adverse macroeconomic developments, may necessitate additional negative rating action.
NATIONAL SCALE RATINGS HISTORY
Initial rating (Nov/2009)
Long term: BBB-(TZ); Short term: A3(TZ)
Last rating (Jun/2014)
Long term: BB+(TZ); Short term: B(TZ)
Sector Head: Financial Institution Ratings
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2015
Tanzania Bank Statistical Bulletin (November 2014)
BancABC Tanzania reports (2009-14)
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 (Tanzania) 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 (Tanzania) Limited 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 (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 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||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.|
|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.|
|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.|
|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.|
|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.|
|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.|
|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.|
|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.|
|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.|
|REPO||In a REPO one party sells assets or securities to another and agrees to repurchase them later at a set price on a specified date.|
|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||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.|