Johannesburg, 10 October 2018 — Global Credit Ratings has downgraded the long term national scale rating assigned to ZB Building Society to BB-(ZW), and affirmed the short-term national scale rating of B(ZW); with the outlook accorded as Stable. The ratings are valid until September 2019.
SUMMARY RATING RATIONALE
The ratings accorded to ZB Building Society (“ZBBS”, “the Society”) reflect its low competitiveness due to its small size and unstable and declining earnings, limitations with strategy, concern regarding the auditor’s opinion of the society as a going concern, the absolute quantum of capital remaining below the statutory minimum, relatively weak asset quality and governance issues within ZB Financial Holdings Limited (“ZBFHL”, the “Group”). However, the ratings also reflect the society’s adequate capitalisation metrics and good liquidity.
The stable outlook reflects our assumptions that capitalisation will remain satisfactory with the Tier 1 capital ratio expected to remain above 50%. The Society’s stable funding structure and liquidity is expected to remain largely unchanged. GCR also assumes that the society will remain a subsidiary of ZBFHL, which is in the process of consolidating the Society into its banking arm, ZB Bank Limited (“ZBBL”, “the Bank”) pending the finalisation of internal disputes. ZBBL is the most significant part of the group contributing 84% of ZBFHL’s assets while ZBBS is smaller contributing 7% of group assets. The ratings accorded do not reflect the effects of the merger.
The Society’s competitive position is low compared to peers due to its small size and low market share. The Society is the smallest building society in the country accounting for 0.4% of total banking sector assets at 31 December 2017. Competition in the mortgage financing space continues to increase because of new entrants.
The Society’s risk position is average in comparison to peers in the market. Asset quality however deteriorated during FY17 with the gross non-performing loans (NPLs) increasing to 8.8% of gross loans at FY17 (FY16: 8.0%). Provision coverage is adequate with provisions covering NPLs by 91.6% at 1H FY18 (FY16: 93.2%), pre-collateral, which increases its risk absorption capacity. Capital relative to assets is also high with a capital to assets ratio of 44.4% at FY17 (FY16: 41.0%).
Earnings declined to a loss of USD0.234m in 1H FY18 as result of a decline in interest income. This after a 36.3% growth in earnings in FY17, driven by a 11.4% increase in non-interest income supported by a rise in trading income, coupled with a 7.2% decline in operating expenditure and decline in impairments. The decline in net interest income was a result of the Society reducing its loan book by 43.1%. ZBBS however, expects to return to profitability by FY18 as it aims to grow its mortgage book by 20%.
The Society’s funding structure is very stable as it is entirely funded by customer deposits. Total funding increased by 8.5% from FY16 to 1H FY18 benefiting from a 67% increase in savings deposits. The Society however reduced the more expensive term deposits by 47.2% which resulted in a decrease in the cost of funding.
ZBBS’ capitalization is considered adequate for the risk level of the society. Total regulatory capital increased by 7.4% to USD18.5m at FY17. The Society’s Tier 1 ratio increased to 53.6% (FY16: 49.4%) at 1H FY18. The Society’s core capital however remains below the statutory minimum required capital of USD20m for building societies.
The Society’s liquidity position is strong with its liquid and trading assets as a percentage of short-term deposits being 127% at FY17 and a liquidity ratio well above the regulatory minimum of 30%. The liquid assets to total assets ratio increased from 35.5% at FY16 to 46.0% at FY17.
The ratings could be negatively affected by a further deterioration in asset quality, inability to meet the minimum capital requirement given a failure to conclude the merger with the Bank. Upward movement is unlikely in the short term. However, the ratings could be positively affected by an improvement in competitiveness, asset quality, growth in earnings, a clear strategy and resolution of governance and shareholding issues at group level.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (December 2002)||Last rating (September 2017)|
|Long-term: BBB(ZW); Short-term: A2(ZW)||Long-term: BB(ZW); Short-term: B(ZW)|
|Outlook: Rating Watch||Outlook: Stable|
|Primary Analyst||Committee Chairperson|
|Vimbai Muhwati||Matthew Pirnie|
|Credit Analyst||Sector Head: Financial institutions|
|(011) 784-1771||(011) 784-1771|
Junior Credit Analyst
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2017
ZBBS rating reports (2002-17)
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 ratings were 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.
ZB Building Society 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 ZB Building Society.
Information received from ZB Building Society and other reliable third parties to accord the credit ratings included:
- Audited financial results as at 31 December 2017 (and four years of comparative numbers)
- Unaudited interim results at 30 June 2018
- Budgeted financial statements for 2018
- 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 ratings above were solicited by, or on behalf of, ZB Building Society, 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 SECTOR 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.|
|Audit Report||A written opinion of an auditor (attesting to the financial statements’ fairness and compliance with generally accepted accounting principles).|
|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|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||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.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Corporate Governance||Refers to the mechanisms, processes and relations by which corporations are controlled and directed, and is used to ensure the effectiveness, accountability and transparency of an entity to its stakeholders.|
|Credit Rating Agency||An entity that provides credit rating services.|
|Default||Failure to meet the payment obligation of either interest or principal on a debt or bond. Technically, a borrower does not default, the initiative comes from the lender who declares that the borrower is in default.|
|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.|
|Impairment||Reduction in the value of an asset because the asset is no longer expected to generate the same benefits, as determined by the company through periodic assessments.|
|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.|
|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.|
|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.|
|National Scale Rating||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.|
|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.|
|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.|
|Regulatory Capital||The total of primary, secondary and tertiary capital.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Security||An asset deposited or pledged as a guarantee of the fulfilment of an undertaking or the repayment of a loan, to be forfeited in case of default.|
|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.|
For a detailed glossary of terms please click here
GCR downgrades ZB Building Society’s rating to BB-(ZW); Outlook Stable.