Johannesburg, 10 July 2020 – GCR Ratings (“GCR”) has affirmed the South African long and short-term issuer ratings of Sasfin Bank Limited at BBB+(ZA)/A2(ZA). The outlook is Negative. At the same time, the long-term international scale rating has been downgraded to B, from B+, due to the changes to the country and sector risk scores, with a Stable outlook.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook / Watch|
|Sasfin Bank Limited||Issuer Long Term||National||BBB+(ZA)||Negative Outlook|
|Issuer Short Term||National||A2(ZA)|
|Issuer Long Term||International||B||Stable Outlook|
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.
The downgrade of Sasfin Bank Limited’s (‘Sasfin’, ‘the bank’) international scale rating reflects the strained operating environment of South Africa and increasing banking sector risk post COVID-19. The national scale ratings have been affirmed, however, based on the credit profile reflecting the strengths and weaknesses of the wider Sasfin Group (‘the group’). The affirmation balances the group’s adequate capital, relatively weak risk and competitive position, weak funding structure and strong liquidity.
Sasfin’s competitive position is modest, given market share of banking business of less than 1%, and limited corporate and retail franchise in comparison to big banks. Nevertheless, the core strength of the bank is its equipment leasing business for SMEs, and the fact that it contributes materially to group revenues is viewed positively. That said, track record of revenue stability has been good over the years and increasingly benefiting from improving diversification largely from the wealth management business that has a relatively stronger franchise versus peers.
Capitalisation is a neutral ratings factor, reflected by an adequate GCR total capital ratio of 16% as at 31 December 2019. We expect the ratio to range between 15-16% over the next 18-24 months due to anticipated pressure on earnings from a potential increase in cost of risk and the soft interest rate environment. Through the cycle earnings have been modest, with the group returning less than 1% of assets (c.1% at 1H2019). Earnings are expected trend broadly in line with sector average, balancing some margin pressure and a stable contribution from non-interest income.
The bank’s risk position is a neutral ratings factor for now, balancing sector average credit losses recorded through the cycle (1.1% at half year-end December 2019) and higher NPLs measuring 9.4% over the same period. Majority of the NPLs are from the construction sector and the given the current low infrastructure spending in the country, heavily SMEs focused loan book, combined with the aftermath effects of the COVID-19 crisis, credit losses are expected to spike over the next 12-18 months, although the rating factors our expectation of 2%. Positively, loan concentrations are low, with top 20 exposures accounting for 18% of total loans. Limited foreign currency lending also benefits the bank’s risk position.
The funding and liquidity assessment factors in some of the structural funding disadvantages of tier 2 banks in South Africa. This is reflected by the relatively limited core transactional deposit franchise which increases the cost of funding. The bank’s core deposits (GCR define these as retail and non-financial corporate deposits) as a percentage of total funding accounted for just under 37% as of 31 December 2019. Furthermore, the bank’s depositor concentrations are somewhat higher than the larger financial institutions. Positively, the structural funding disadvantages are balanced by good liquidity in the bank. Liquidity is supported by the very short-term loan book that has c.70% of exposures maturing within 12 months. The bank also maintains a good regulatory liquidity coverage ratio of 153% as at 31 Dec. 2019 vs the revised required minimum of 80%.
The outlook on national scale ratings is negative, as we anticipate the impact of a strained economy on SME to weigh on bank’s asset quality reflected by increasing NPLs and cost of risk.
A national scale downgrade could be caused by higher than anticipated credit losses, poor earnings or a reduction in capital adequacy. The upside to the national scale ratings is limited, although increased business diversification, a stronger funding structure, and stronger capitalisation could result in a rating improvement. Alongside the above, a further downgrade in the international scale ratings could be caused by worsening operating environment.
|Primary analyst||Simbarake Chimutanda||Financial Institutions Analyst|
|Johannesburg, ZA||SimbarakeC@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|
Sasfin Bank Limited
|Rating class||Review||Rating scale||Rating class||Outlook||Date|
|Long Term issuer||Initial||National||BBB+(ZA)||Stable||May 2016|
|Short Term issuer||Initial||National||A1-(ZA)||N/a||May 2016|
Risk score summary
|Rating Components & Factors||Risk scores|
|Country risk score||7.00|
|Sector risk score||7.50|
|Management and governance||0.0|
|Capital and Leverage||0.00|
|Funding and Liquidity||(0.50)|
|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 been disclosed to the rated entity.
The ratings of the following entities were solicited by, or on behalf of, the rated entities, and therefore, GCR has been compensated for the provision of the ratings.
Sasfin Bank Limited participated in the rating process via teleconference management meetings, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information received from the entities and other reliable third parties to accord the credit ratings included:
- Audited financial results as at 31 December 2019;
- Management accounts for 2020;
- Budgeted financial statements for 2020;
- Latest internal and/or external audit report to management;
- A breakdown of facilities available and related counterparties; and
- Industry comparative data.