Announcements Financial Institutions Rating Alerts

GCR downgrades First Rand Bank Limited’s international scale long term issuer rating to BB, on the back of operating environment changes

Rating Action

Johannesburg, 10 July 2020 – GCR Ratings (“GCR”) has downgraded First Rand Bank Limited’s unsolicited international scale long term issuer rating to BB, from BB+, due to changes in the country and sector risk scores, with a Stable Outlook. At the same time, GCR has affirmed the unsolicited South African national scale long term and short term issuer ratings of AA+(ZA)/A1+(ZA). The Outlook is Negative.

Rated Entity

Rating class

Rating scale

Rating

Outlook/Watch

FirstRand Bank Limited

Long Term issuer

National

AA+(ZA)

Negative

Short Term issuer

National

A1+(ZA)

Long term issuer

International

BB

Stable

The rating action follows a reduction in the South African country and financial institutions sector risk assessments.

  • On June 24, 2020, the South African Financial Institutions sector risk score was lowered to 7.5, from 8.0 previously. Click here to access link.
  • The South African country risk score was also lowered to 7.0, from 7.5 previously, in a market alert released on the 27th May 2020. Click here to access link.

Combined, the above country and sector risk scores comprise the operating environment score, which is a key input into GCR’s ratings.

Rating Rationale

In line with other major South African Banking groups, FirstRand Bank Limited’s (“FirstRand”) national scale rating has been placed on Negative outlook, reflecting the highly strained operating environment in the core market. While credit losses are likely to be aligned to that of peers, a potentially adverse turnout in the UK operations could result in weaker than anticipated asset quality, which could impede the rating. This, alongside reduced earnings forecasts may also constrain capital adequacy. While the international scale rating has been downgraded on the back of the lower operating environment score, GCR believes that there is sufficient headroom in the current rating to maintain a stable outlook on the international scale rating.

The unsolicited international and South African national scale ratings on FirstRand reflect the strengths and weaknesses of the FirstRand Group (“the group”), a large and diverse financial group domiciled in South Africa. The group has a strong local market presence with entrenched positions in key sectors and sub sectors, which along with reasonable geographic and business line diversity, supports a good competitive profile. The loan book is also viewed to be well diversified and credit losses are likely to be in and around the top tier peer average. Along with major South African peers, capitalisation is well managed with sufficient buffers to absorb market stress, while funding and liquidity remain adequate.

The group’s operations are predominantly in South Africa (approximately 75% of total group loans). FirstRand offers universal banking services, with a strong retail and corporate franchise. It is also the most consistent earnings performer in the top tier of the oligopolistic South African banking sector. At year-end 2019, the South African bank had a total asset market share of 22%. In the United Kingdom (c20% of total group loans), the group owns a challenger bank and vehicle asset finance provider, which adds some good geographic diversification. The rest of Africa (c5% of total group loans) are dominated by their top tier Namibian and Botswanan entities.

We anticipate that the GCR capital ratio for the group will hover around 12-12.5% over the next two years, which is at the lower end of the intermediate range. However, we do expect the continuation of good earnings, albeit lower than historic highs, and more conservative dividend pay-outs over coming periods to absorb some of the lost earnings capacity during the COVID-19 pandemic.

While credit losses are expected to rise materially over the next two years, we believe that credit losses for the group will be fairly well contained relative to regional markets, and more importantly, aligned to the major peer group. GCR has factored into the rating credit losses to almost double in the coming year, to just under 2%, but loan loss coverage is still expected to compare well relative to the market.

Funding and liquidity are considered to be adequate. The group is exposed to the same structural funding risks as the other top tier South African banks, i.e. medium-term wholesale funding concentrations with financial corporates. However, we believe that there is slightly better diversity in the book given the success of its deposit mobilisation. The Net Stable Funding Ratio (“NSFR”) for the group is 112%, again well above the regulatory limit of 100%, which has been altered from global norms for the aforementioned structural funding risks. The group’s liquidity looks appropriate, with liquid assets covering 28% of deposits and 1.2x of wholesale funding.

Outlook Statement

In line with other major South African Banking groups, FirstRand’s national scale rating has been placed on Negative outlook, reflecting the highly strained operating environment in the core market. While credit losses are likely to be aligned to that of peers, a potentially adverse turnout in the UK operations could result in weaker than anticipated asset quality, which could impede the rating. This, alongside reduced earnings forecasts may also constrain capital adequacy. While the international scale rating has been downgraded on the back of the lower operating environment score, GCR believes that there is sufficient headroom to maintain a stable outlook on the international scale rating.

Rating Triggers

Should credit losses rise significantly above expectations and industry peers, or there is a material weakening in profitability, the national scale ratings will be downgraded as this will also negatively impact capitalisation and constrain risk based capital adequacy to below rating adequate levels. The bank’s international scale rating could be lowered if the country risk of South Africa deteriorates significantly, most likely due to the weakening position of its sovereign. The outlook on the national scale rating may revert to stable should credit losses be more favourable than expected, and/or capitalisation improves.

Analytical Contacts

Primary analyst

Vinay Nagar

Senior Financial Institutions Analyst

Johannesburg, ZA

Vinay@GCRratings.com

+27 11 784 1771

     

Committee chair

Matthew Pirnie

Group Head of Ratings

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, May 2020

GCR Financial Institutions Sector Risk Score, June 2020

Ratings History

FirstRand Bank Limited

Rating class

Review

Rating scale

Rating class

Outlook

Date

Long Term issuer

Initial

National

AA(ZA)

Stable

December 2010

Last

National

AA+(ZA)

Stable

August 2019

Initial

International

BBB

Stable

November 2013

Last

International

BB+

Stable

August 2019

Short Term issuer

Initial

National

A1+(ZA)

N/a

December 2010

Last

National

A1+(ZA)

N/a

August 2019

RISK SCORE SUMMARY

Rating Components & Factors

Risk scores

 

 

Operating environment

15.50

Country risk score

8.00

Sector risk score

7.50

   

Business profile

1.50

Competitive position

1.50

Management and governance

0.00

   

Financial profile

0.50

Capital and Leverage

(0.50)

Risk

1.00

Funding and Liquidity

0.00

   

Comparative profile

0.00

Group support

0.00

Government support

0.00

Peer analysis

0.00

   

Total Score

17.50

Glossary

Balance Sheet

Also known as 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.

Capital

The sum of money that is invested to generate proceeds.

Cash

Funds that can be readily spent or used to meet current obligations.

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.

Diversification

Spreading risk by constructing a portfolio that contains different exposures 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.

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. In insurance, it refers to an individual or company’s vulnerability to various risks

Income

Money received, especially on a regular basis, for work or through investments.

Interest

Scheduled payments made to a creditor in return for the use of borrowed money. The size of the payments will be determined by the interest rate, the amount borrowed or principal and the duration of the loan.

Issuer

The party indebted or the person making repayments for its borrowings.

Leverage

With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.

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 Rating

See GCR Rating Scales, Symbols and Definitions.

Margin

A term whose meaning depends on the context. In the widest sense, it means the difference between two values.

Market

An assessment of the property value, with the value being compared to similar properties in the area.

Maturity

The length of time between the issue of a bond or other security and the date on which it becomes payable in full.

Rating Outlook

See GCR Rating Scales, Symbols and Definitions.

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 Rating

See GCR Rating Scales, Symbols and Definitions.

Short Term

Current; ordinarily less than one year.

SALIENT POINTS OF ACCORDED RATINGS

GCR affirms that a.) no part of the ratings was 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; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

The credit ratings have not been disclosed to the rated entity.

The ratings were unsolicited, and therefore, GCR has been not been compensated for the provision of the ratings.

First Rand Bank Limited, did not participate in the ratings process, however the quality of public disclosure from audited accounts and risk management booklets, alongside regulatory returns, meets out information sufficiency requirements.

 

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