Announcements

GCR downgrades Agricultural Bank of Zimbabwe Limited’s rating to B+(ZW); Outlook Negative.

Johannesburg, 29 Oct 2014 — Global Credit Ratings has downgraded Agricultural Bank of Zimbabwe Limited’s national scale ratings to B+(ZW) and B(ZW) in the long term and short term respectively; with the outlook accorded as Negative. The ratings are valid until 10/2015.

SUMMARY RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit ratings to Agricultural Bank of Zimbabwe Limited (“Agribank” or “the bank”) based on the following key criteria:

The ratings downgrade reflects Agribank’s high level of business risk, shown by shortfalls in its capital and liquidity metrics; the sharp deterioration in the quality of its loan book, which contains chronic impaired credits which appear underprovided; illiquid balance sheet (constraining its risk absorption capacity); and weakened profitability amid lower volumes of loan sales and significantly increased impairment charges.

All of these rating drivers continue to be exacerbated by the increasingly challenging operating conditions.

Agribank’s ratings have historically been underpinned by the demonstrated support of its shareholder, the Zimbabwean government. Supporting agriculture is strategically important for the government, and Agribank plays a key role in facilitating the funding for this sector. However, a lack of essential capital support from the parent (given government’s depleted financial reserves) during the period under review, has raised concerns over the shareholder’s ability to support the bank. Therefore, to what extent further shareholder support can be relied upon remains uncertain.

The negative rating outlook is a reflection of the bank’s prospects, which are subject to high forecast risk given the tightening operating environment, and the uncertainty surrounding shareholder support (which places the bank’s sustainability at risk). Moreover, the bank’s weaker earnings generation capacity reduces its ability to absorb credit losses. In addition, the potential for further asset and cash flow volatility, in view of the more challenging conditions facing the bank, should not be overlooked.

Given the negative rating outlook and the bank’s fragile operating environment, there is currently limited upside rating potential. The ratings may be affirmed at current levels if the bank substantially increases its capital and/or significantly improves its protection factors. Agribank’s ratings could be further downgraded if the bank fails to raise adequate capital or is unable to gain access to sufficient market funding. The ratings will also be sensitive to further deterioration in asset quality, long-term earnings prospects (providing a weakened buffer to counter the inherent risk in its business model) and/or the bank’s inability to meet the regulatory capital and liquidity requirements.

NATIONAL SCALE RATINGS HISTORY

Initial rating (Aug/2006)
Long term: BBB-(ZW)
Outlook: Negative

Last rating (Nov/2013)
Long term: BBB-(ZW); Short term: A3(ZW)
Outlook: Negative

ANALYTICAL CONTACTS

Primary Analyst
Kurt Boere
Credit Analyst
(011) 784-1771
boere@globalratings.net

Committee Chairperson
Omega Collocott
Head: Financial Institution Ratings
(011) 784-1771
omegac@globalratings.net

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Banking Criteria (updated April 2014) Zimbabwe Bank Statistical Bulletin (2013)
Previous Rating Reports (up to 2013)

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.

The ratings above were solicited by, or on behalf of, Agricultural Bank of Zimbabwe Limited, and therefore, GCR has been compensated for the provision of the ratings.

Agricultural Bank 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 Agricultural Bank of Zimbabwe Limited with no contestation of the rating.

The information received from Agricultural Bank of Zimbabwe Limited and other reliable third parties to accord the credit rating included the latest audited annual financial statements as at 31 December 2013 (plus three years of comparative numbers), most recent year to date unaudited published accounts to 30 June 2014, 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

Balance Sheet

Basic financial statements, usually accompanied by appropriate disclosures that describe the basis of accounting used in its preparation and presentation of a specified date the entity’s assets, liabilities and owners’ equity. Also known as a statement of financial position.

Corporate Governance

The manner in which an entity is governed and decisions are undertaken.

Credit Rating Agency

A party that provides an opinion on the credit quality of assets, debt securities and companies.

Credit risk

Risk that a party to a contractual agreement or transaction will be unable to meet their obligations or will default on commitments. Credit risk can be associated with almost any transaction or instrument such as swaps, repos, CDs, foreign exchange transactions, etc. Specific types of credit risk include sovereign risk, country risk, legal or force.

Default

Failure to make loan payments on a timely basis or to comply with other terms/requirements as stipulated in the loan agreement.

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 and its results of operations for a period then ended.

Impairment

An amount set aside for expected losses to be incurred by a creditor.

Income Statement

Summary of the effect of revenues and expenses over a period of time.

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.

Liquidity Risk

Liquidity is the ability to fund increases in assets and meet obligations as they become due, without incurring unacceptable losses.

Rating Outlook

A rating outlook indicates the potential direction of a rating over the medium term, typically a one to two year period.

Regulatory Capital

The total of primary, secondary and tertiary capital.

Sovereign Risk

The risk of default by the government of the country on its obligations.

Tertiary Capital

Tertiary capital means accrued current-year uncapitalised net profits derived from trading activities; and capital obtained by means of unsecured subordinated loans, subject to such conditions as may be prescribed.

GCR downgrades Agricultural Bank of Zimbabwe Limited’s rating to B+(ZW); Outlook Negative.

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