Johannesburg, 30 Apr 2015 — Global Credit Ratings has downgraded CBZ Bank Limited’s national scale long term rating to A(ZW) and affirmed its national scale short term rating of A1(ZW), with the ratings placed on ‘Rating Watch’. The ratings are valid until 10/2015.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to CBZ Bank Limited (“CBZ” and/or “the bank”) based on the following key criteria:
The ratings of CBZ have historically factored in its strong financial profile, underpinned by a firm domestic brand recognition (being the largest bank in Zimbabwe), solid capitalisation, healthy profitability and sound liquidity/funding. The downgrade of the bank’s rating reflects sustained deterioration in the bank’s asset quality indicators, coupled with declining profitability. The ‘Rating Watch’ reflects the short term outcomes of the proposed sale of non-performing loans (“NPL”) to the Zimbabwe Asset Management Company (“ZAMCO”), a special purpose vehicle formed to buy banks’ secured NPLs in exchange for long term treasury bonds, and the outcome of collection efforts of ‘special mention’ loans (which are classified as past due but not impaired loans), which will be closely monitored by GCR.
CBZ has maintained an adequate capital position. Both the bank’s risk weighted capital adequacy (“RWCA”) and Tier I capital ratios have remained above the minimum regulatory thresholds. However, higher capital buffers might be required if the bank experiences increased delinquencies.
CBZ’s gross NPL ratio rose to 8.2% at FYE14 from 4.9% at FYE13, reflecting the challenging operating environment. While it is noted that the bank increased its collections of arrears in 1Q F15, the high level of ‘special mention’ loans (largely stemming from the agricultural sector, which has experienced a poor season) remains a concern. On a positive note, the bank increased its provisioning and collateral coverage, has limited lending, and has restructured its credit collection and recovery system. The bank also plans to enhance the quality of its loan book through the sale of NPLs to the ZAMCO. However, the impact of the implemented changes remains to be seen.
The bank remained profitable in F14, although earnings dropped by 7.3% to USD16.3m and return on average assets and equity declined to 1.1% and 13.6% respectively in F14 (F13: 1.4%; 16.8%). The decline was mainly due to a contraction in net interest margins, owing to a high cost of funding and an increase in operating costs (largely stemming from staff costs).
CBZ has a strong funding profile and a comfortable liquidity position, with sizeable cumulative liquidity buffers displayed across the 1 month and 1-3 month maturity buckets at FYE14. Further, the bank’s strong liquidity position is reflected by its high liquidity ratio of 45.4% at FYE14, which remained well above the regulatory minimum threshold of 30%.
GCR sees limited scope for an upward movement of the bank’s ratings, in light of the difficult operating environment. However, sustained improvements in the bank’s credit profile, earnings power and capitalisation, resulting in enhanced resilience to a volatile operating environment, could positively impact the bank’s ratings. A continued weakening of the bank’s asset quality metrics, lower earnings and capital strain, or a subsequent deterioration in the bank’s solvency indicators, would exert downward pressure on the bank’s ratings.
NATIONAL SCALE RATINGS HISTORY
Initial rating (Sep/2000)
Long term: A-(ZW); Short term: A2(ZW)
Outlook: Stable
Last rating (Apr/2014)
Long term: A+(ZW); Short term: A1(ZW)
Outlook: Stable
ANALYTICAL CONTACTS
Primary Analyst
Kuzivakwashe Murigo
Credit Analyst
(011) 784-1771
murigo@globalratings.net
Committee Chairperson
Omega Collocott
Sector Head: Financial Institution Ratings
(011) 784-1771
omegac@globalratings.net
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2015
Zimbabwe Bank Statistical Bulletin (December 2014)
CBZ rating reports (2000-14)
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; 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, the CBZ Bank Limited, and therefore, GCR has been compensated for the provision of the ratings.
CBZ Bank 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 rating/s has been disclosed to and contested by CBZ Bank Limited and was not amended following the provision of further information by the entity.
The information received from CBZ Bank Limited and other reliable third parties to accord the credit rating included the latest audited financial statements as at 31 December 2014 (plus four years of comparative numbers), 31 March 2015 management accounts, latest internal and/or external report to management, 2015 budgeted financial statements, corporate governance and enterprise risk framework, capital management policy, 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. |
| 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. |
| Collateral | Asset provided to a creditor as security for a loan. |
| 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. |
| 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. |
| 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. |
| Long term | Not current; ordinarily more than one year. |
| 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 | 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. |
| Net Interest Margin | Net interest margin is the net interest income divided by average interest earning assets. |
| Non-Performing Loan | When a borrower is overdue, typically 90+ days in arrears or as defined by the lender, or in the transaction documents. |
| Past Due | Any note or other time instrument of indebtedness that has not been paid on the due date. |
| Performing Loan | A loan is said to be performing if the borrower is paying the interest on it on a timely basis. |
| Portfolio | A collection of investments held by an individual investor or financial institution. They may include stocks, bonds, futures contracts, options, real estate investments or any item that the holder believes will retain its value. |
| Principal | The total amount borrowed or lent, e.g. the face value of a bond, excluding interest. |
| Provision | The amount set aside or deducted from operating income to cover expected or identified loan losses. |
| Rating Watch | Indicates that a rating is under review for possible change in the short term and the movement may be either positive or negative. |
| Risk | The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives. |
| 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. |
| Solvent | The state of a company where its assets exceed its liabilities and it is able to service its debt and meet its other obligations, especially in the long-term. |
| Special Purpose Vehicle | An entity that is created to fulfil specific objectives. An SPV is normally bankruptcy/insolvency remote and created to isolate financial risks. |
