Announcements

GCR downgrades ZB Building Society Limited’s rating to BB+(ZW); Rating Watch.

Johannesburg, 4 Dec 2014 — Global Credit Ratings has downgraded ZB Building Society Limited’s national scale long term rating to BB+(ZW), and affirmed its short term rating of A3(ZW) with the ratings placed on Rating Watch. The ratings are valid until 5/2015.

SUMMARY RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit rating(s) to ZB Building Society Limited based on the following key criteria:

The ratings of ZB Building Society Limited (“ZBBS” or “the Society”), a subsidiary of ZB Financial Holdings Limited (“ZBFHL” or “the Group”), are weighed down by the reduction in profitability, emanating from cost sharing with ZB Bank Limited (“the Bank”), the banking arm of the Group, concerns regarding the absolute quantum of capital remaining below the statutory minimum, and an increasingly negative operating environment. The Society’s ratings are expected to be withdrawn once ZBBS is consolidated into the Bank (should the merger materialise).

ZBBS’s total risk weighted capital adequacy ratio (“RWCAR”) of 43.3% as at 1H F14 was well above the regulatory minimum of 12%. Notwithstanding this, the Society’s core capital of US$15.9m stands below the current statutory required minimum capital of US$25m for Tier II building societies. The strategic initiative to merge the Society with the Bank is aimed, in part, at regularising the capital deficit of ZBBS. However, should the merger fail to materialise, the Society will need to approach its shareholders for capital injection/s.

Although supported by the low default risk on housing loans, credit quality has lately been affected by the adverse operating environment, which has mainly affected the Society’s consumer loan book. In this regard, gross non-performing loans (“NPLs”) rose to 5.9% of gross advances at 1H F14 from 1.5% at FYE12 (breaching the best practice ceiling of 5%). In spite of this, ZBBS’s gross NPL ratio remained well below the industry average of approximately 18.5% at 1H F14.

Financial performance remained relatively firm in F13, considering the difficult operating environment and the impact of regulatory changes pertaining to the capping of lending rates. In 1H F14, income generation improved relative to the prior corresponding period, but accelerating costs associated with cost sharing with the Bank and increased impairment charges, led the Society to register a marked decline in pre-tax profits compared to the same period last year.

Notwithstanding the fairly short term maturity profile of the Society’s deposit book relative to its longer dated advances portfolio (which indicates elevated liquidity risk), sizeable cumulative liquidity buffers were displayed across all maturity buckets as at 1H F14. Further, the Society’s strong liquidity position is reflected by its high liquid and trading assets/total funding (excl. equity) ratio of 51.6% at 1H F14 (FYE13: 57.2%).

A positive change in the Society’s ratings will be premised on the resolution of regulatory capital issues, improved profitability (normalising operating costs) and the ability of the Society to pursue strategic goals, subsequent to the resolution of the impending corporate action. Negative rating action could result from a failure of the merger with the Bank, and subsequent inability to raise capital to the prescribed levels. Further downward pressure will stem from reduced profitability resulting from a rising cost base/allocation, diminished market profile, or the negative operating environment.

NATIONAL SCALE RATINGS HISTORY

Initial rating (Dec/2002)
Long term: BBB(ZW); Short term: A2(ZW)
Rating Watch: Yes

Last rating (May/2014)
Long term: BBB-(ZW); Short term: A3(ZW)
Rating Watch: Yes

ANALYTICAL CONTACTS

Primary Analyst
Kuzivakwashe Murigo
Credit Analyst
(011) 784-1771
murigo@globalratings.net

Committee Chairperson
Omega Collocott
Head: Financial Institution Ratings
(011) 784-1771
omegac@globalratings.net

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Banking Criteria (updated April 2014)
Zimbabwe Bank Bulletin (December 2013)
Previous Rating Reports (up to 2013)

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.

The ratings above were solicited by, or on behalf of, ZB Building Society Limited, and therefore, GCR has been compensated for the provision of the ratings.

ZB Building Society 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 rating/s has been disclosed to ZB Building Society Limited with no contestation of the rating.

The information received from ZB Building Society Limited and other reliable third parties to accord the credit rating included the latest audited financial statements as at 31 December 2013 (plus four years of comparative numbers), latest internal and/or external report to management, unaudited management accounts for 30 June 2014, as well as its corporate governance and enterprise risk framework.

GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S FINANCIAL INSTITUTIONS GLOSSARY

Audited Financial Statements

Financial statements that have been audited by a certified auditor, stating that the financial statements present a true and fair picture of the entity’s financial condition.

Building society

A type of deposit-taking financial institution that engages in long-term mortgage lending, primarily to finance owner-occupied residential mortgages/property.

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.

Core Capital

See primary capital.

Corporate Governance

The manner in which an entity is governed and decisions are undertaken.

Credit Rating Agency

A party that provides an opinion on the credit quality of assets, debt securities and companies.

Credit risk

Risk that a party to a contractual agreement or transaction will be unable to meet their obligations or will default on commitments. Credit risk can be associated with almost any transaction or instrument such as swaps, repos, CDs, foreign exchange transactions, etc. Specific types of credit risk include sovereign risk, country risk, legal or force.

Default

Failure to make loan payments on a timely basis or to comply with other terms/requirements as stipulated in the loan agreement.

Financial Institution

An entity that focuses on dealing with financial transactions, such as investments, loans and deposits.

Financial Statements

Presentation of financial data including balance sheets, income statements and statements of cash flow, or any supporting statement that is intended to communicate an entity’s financial position at a point in time and its results of operations for a period then ended.

Impairment

An amount set aside for expected losses to be incurred by a creditor.

Liquidity Risk

Liquidity is the ability to fund increases in assets and meet obligations as they become due, without incurring unacceptable losses.

Non-performing loan

When a borrower is overdue, typically 90 + days in arrears or as defined in the transaction documents.

Primary 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.

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.

Sovereign Risk

The risk of default by the government of the country on its obligations.

GCR downgrades ZB Building Society Limited’s rating to BB+(ZW); Rating Watch.

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