Rating Action
Johannesburg, 19 December 2019 – GCR Ratings (‘GCR’) has downgraded African Banking Corporation (Tanzania) Limited’s (“BancABC Tanzania”, “the bank”) long and short term Tanzanian national scale ratings to CCC+(TZ)/C(TZ), from B+(TZ)/B(TZ) respectively. The outlook has been accorded as Stable
| Rated Entity / Issue | Rating class | Rating scale | Rating | Outlook / Watch |
| African Banking Corporation (Tanzania) Limited | Issuer Long Term | National | CCC+(TZ) | Stable |
| Issuer Short Term | National | C(TZ) | n.a |
On May 22, 2019 GCR announced that it had released new criteria for all banks and bank-like entities. This methodology is titled Criteria for Rating Financial Institutions. As a result, the ratings were placed “Under Criteria Observation”. Subsequently, GCR has reviewed the ratings under the new methodology, and the ratings have been removed from ‘Under Criteria Observation’.
Rating Rationale
BancABC Tanzania’s national scale long term issuer rating of CCC+(TZ) reflects the bank’s modest franchise, low levels of capitalisation, weak funding structure and just adequate liquidity, and improving risk position. The accorded ratings also factor in support from the bank’s parent, ABC Holdings Limited.
ABC Holdings Limited intends to do a share swap including BancABC Tanzania along with three other sister banks, for an equity stake in Kenya-based Equity Group Holdings Plc. Whilst we believe there is a fairly strong chance of the deal happening, we do not know the exact timing or details regarding the transaction. However, we do factor in continued support by the parent for the Tanzanian entity until the deal is complete.
The bank’s company profile is considered to be a negative ratings factor, reflecting the second tier position in a fragmented domestic market, lack of geographical diversification outside Tanzania and eroding revenues, coupled with ongoing bottom line losses. The bank has four major business pillars, namely retail banking, commercial banking, global markets and treasury. Traditionally, the bank has been focused on corporate banking, although in recent years it has started shifting its strategy to grow retail business. BancABC Tanzania has a modest market share of c.1%.
Due the low levels of the rating, we have not factored in management and governance shortfalls into the rating.
BancABC Tanzania capitalisation is considered to be low as reflected by a GCR Capital Ratio of 15% at 3Q19 (FY18: 13%), although the regulatory capital adequacy ratio is healthier at 16.9% as of the same period. The slight improvement in the capital ratio is attributable to a US$3m capital injection from the shareholders at the beginning of FY19 and a contracting risk asset base. The bank’s loan book shrunk by c.40% between FY17 and FY18 and a further 22% as at 3Q19 due to substantial write offs, in addition to the selective lending to SMEs and increased focus to transactional business banking. We think that BancABC Tanzania’s capital will likely remain subdued over the rating horizon largely due to poor internal capital generation.
The bank’s risk position is a slight negative to the rating, balancing asset quality that is broadly in line with the market, with somewhat high counterparty concentrations, with top 20 NPLs accounting for c.69% of total NPLs at 3Q19.
We believe asset quality is improving, largely due to loan restructurings and write offs, and not necessarily an improvement in the bank’s underwriting processed. As such, the non-performing loans (NPLs) ratio improved to a still high 14.8% at 3Q19 from 30.7% (FY17) years earlier. Broadly, we believe that the through the cycle credit losses of 1.8% are in line with market. We will be monitoring the bank’s underwriting and risk appetite over the rating horizon to see if the current position will be sustained or further improved based on the quality of written loans. Positively, loan loss reserve coverage of NPLs of 85% at FY18 is considered to be adequate.
The bank’s funding and liquidity is considered to be ratings negative, reflecting the reliance on less stable funding from banks and other financial institutions, which accounted for 49% of total deposits at 3Q19. Furthermore, we consider the bank’s funding structure to be costly relative to peers as reflected by a cost of funds of 8.3% at 3Q19. The high cost of funds is mainly attributable to the loss of public sector funding which partly resulted in the bank’s deposits shrinking by c.113% between FY17 and FY18, hence the bank’s reliance on more expensive borrowings to meet its funding needs.
We also believe that BancABC Tanzania’s liquidity is somewhat strained by the more confidence sensitive funding structure. The GCR liquid assets to total wholesale funding coverage and the GCR liquid assets to customer deposits ratio decreased to 0.56x and 20% at 3Q19 from 1.06x and 78% at FY18, respectively. We think that BancABC Tanzania’s funding and liquidity will remain a relative weakness for the bank over the rating horizon however with gradual improvements as the bank mobilises sufficient retail or non-bank corporate deposits.
Rating Outlook
The Stable outlook reflects our expectation that the bank will likely sustain its current credit profile over the rating horizon.
Rating Triggers
A negative rating action could follow a further deterioration in funding and liquidity, and capital erosion. Ratings upside could result from a sustained improvement in capitalisation, ongoing improvements in asset quality and a strengthening in funding and liquidity.
Furthermore, the impact from the equity swap deal could result in either positive or negative rating action, depending on its impact on the bank. Although, we likely see more upside giving the relative creditworthiness of the parent.
Analytical Contacts
| Primary analyst | Nyasha Chikwengo | Financial Institutions Analyst |
| Johannesburg, ZA | NyashaC@GCRratings.com | +27 11 784 1771 |
| Secondary Analyst | Kudzanai Samanga | Financial Institutions Associate |
| Johannesburg, ZA | KudzanaiS@ GCRratings.com | +27 11 784 1771 |
| Committee chair | Matthew Pirnie | Sector Head: Financial Institutions |
| Johannesburg, ZA | MatthewP@GCRratings.com | +27 11 784 1771 |
Related Criteria and Research
| Criteria for the GCR Ratings Framework, May 2019 |
| Criteria for Rating Financial Institutions, May 2019 |
| GCR Ratings Scale, Symbols & Definitions, May 2019 |
| GCR Country Risk Scores, June 2019 |
| GCR Financial Institutions Sector Risk Score, December 2019 |
| BancABC Tanzania Report, October 2018 |
| GCR affirms ABC Holdings’ national scale rating of B(BW); maintains Rating Watch Evolving, November 2019 |
Ratings History
African Banking Corporation (Tanzania) Limited
| Rating class | Review | Rating scale | Rating class | Outlook | Date |
| Issuer Long Term | Initial | National | BBB-(TZ) | Negative | November 2009 |
| Last | National | B+(TZ) | Stable | October 2018 | |
| Issuer Short Term | Initial | National | A3(TZ) | n.a | November 2009 |
| Last | National | B(TZ) | n.a | October 2018 |
Risk Score Summary
| Risk score | |
| Operating environment | 6.50 |
| Country risk score | 4.00 |
| Sector risk score | 2.50 |
| Business profile | -3.00 |
| Competitive position | -3.00 |
| Management and governance | 0.00 |
| Financial profile | -5.00 |
| Capital and Leverage | -2.50 |
| Risk | -0.50 |
| Funding structure and Liquidity | -2.00 |
| Comparative profile | 3.00 |
| Group support | 3.00 |
| Peer analysis | 0.00 |
| Total Score | 1.50 |
Glossary
| Capital | The sum of money that is invested to generate proceeds. |
| Cash | Funds that can be readily spent or used to meet current obligations. |
| Cash Flow | The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities. |
| 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. |
| 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. |
| 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. |
Salient Points of Accorded Ratings
GCR affirms that a.) no part of the ratings were 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; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The credit rating has been disclosed to African Banking Corporation (Tanzania) Limited. The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings.
African Banking Corporation (Tanzania) Limited participated in the rating process via teleconference and written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information used to analyse African Banking Corporation (Tanzania) Limited and accord the credit ratings included:
- Unaudited financial results as at 30 September 2019;
- Audited financial statements as at 31 December 2018;
- Banking sector information;
- Industry comparative data; and
- Other publicly available information.
