Johannesburg, 27 June 2016 — Global Credit Ratings has downgraded FBC Bank Limited’s long term national scale rating to BBB+(ZW) and affirmed its short term national scale rating of A2(ZW); with the outlook accorded as Stable. The ratings are valid until June 2017.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to FBC Bank Limited (“FBC Bank”, “the bank”) based on the following key criteria:
FBC Bank’s negative rating trajectory reflects its asset quality problems since F13, on the back of current economic challenges in Zimbabwe. This is indicated by an increase in past due loans to 48.8% of total loans at 31 May 2016 (FYE15: 40.4%; FYE14: 41.3%; FYE13: 20.3%). In addition, the bank’s systems, prospects and absolute credit strength relative to other rated players in the Zimbabwean banking space were taken into account.
The bank’s gross non-performing loan (“NPL”) ratio normalised to 8.0% at FYE15 due to significant write-offs and the acquisition of eligible NPLs to the value of USD7.3m by the Zimbabwe Asset Management Corporation (“ZAMCO”), a special purpose vehicle formed to buy banks’ secured NPLs in exchange for long-term treasury bonds. However, the level of past due but not impaired loans increased from USD25.7m at FYE13 to USD78.9m at 31 May 2016, despite the total loan book decreasing by 8.1% over this period. At 31 May 2016, NPLs were 51.1% covered by specific provisions (FYE15: 60.1%; FYE14: 34.7%; FYE13: 50.0%).
FBC Bank’s Tier I capital of USD32.9m complied with the current minimum regulatory requirement of USD25m, but was low when compared to industry peers at 31 December 2015. The bank’s risk weighted capital adequacy ratio (“RWCAR”) reduced to 14.7% at FYE15 from 15.8% at FYE14, but remained compliant with the regulatory minimum of 12%.
In addition to high depositor concentrations, the bank’s short term negative contractual asset/liability mismatches at FYE15 (as a result of short-term liabilities funding long-term assets) heightens liquidity risk. However, the bank’s prudential liquidity ratio (on average) remained above the minimum regulatory requirement of 30% throughout F15.
FBC Bank recorded a profit before tax of USD9.3m in F15 compared to USD2.2m which was attained in F14 (F13: USD7.1m) after a fair value loss adjustment of USD5.9m on the disposal of Turnall Holdings Limited. ROaE and ROaA improved to 21.7% and 2.1% in F15 respectively.
Given the challenging operating environment, and the bank’s current level of credit risk, there is limited upside rating potential in the short term. Negative rating action would likely follow a weakening in asset quality, capitalisation and/or liquidity metrics below the most recent figures and/or current expectations.
NATIONAL SCALE RATINGS HISTORY
Initial rating (Jun/2006)
Long term: BBB+(ZW)
Outlook: Rating Watch
Last rating (Jun/2015)
Long term: A-(ZW); Short term: A2(ZW)
Sector Head: Financial Institution Ratings
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2016
FBC Bank rating reports (2006-15)
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.
FBC Bank 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 ratings have been disclosed to FBC Bank Limited with no contestation of the rating.
The information received from FBC Bank Limited and other reliable third parties to accord the credit ratings included:
- Audited financial results as at 31 December 2015 (and four years of comparative numbers)
- Unaudited management accounts as at 31 May 2016
- Budgeted financial statements for 2016
- 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 rating above was solicited by, or on behalf of, FBC Bank 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
|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.|
|Bond||A long term debt instrument issued by either: a company, institution or the government to raise funds.|
|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.|
|Fair Value||The fair value of a security, an asset or a company is the rational view of its worth. It may be different from cost or market value.|
|Liabilities||All financial claims, debts or potential losses incurred by an individual or an organisation.|
|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.|
|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.|
|Provision||The amount set aside or deducted from operating income to cover expected or identified loan losses.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|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.|
|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.|
|Tier I Capital||Primary capital consists of issued ordinary share capital, hybrid debt capital, perpetual preference share capital, retained earnings and reserves. This amount is then reduced by the portion of capital that is allocated to trading activities and other regulatory deductions.|
For a detailed glossary of terms utilised in this announcement please click here
GCR downgrades FBC Bank Limited’s rating to BBB+(ZW); Outlook Stable.