Announcements

GCR downgrades ZB Building Society’s rating to BB-(ZW); Outlook Stable.

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

ANALYTICAL CONTACTS

Primary Analyst   Committee Chairperson
Vimbai Muhwati   Matthew Pirnie
Credit Analyst   Sector Head: Financial institutions
(011) 784-1771   (011) 784-1771
vimbaim@globalratings.net

Secondary Analyst

Victor Matsilele

Junior Credit Analyst

(011) 784-1771

victorm@globalratings.net

   matthewp@globalratings.net

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.

image_pdfPDF View

Leave a Reply



ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK:HTTP://GCRRATINGS.COM. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT WWW.GCRRATINGS.COM/RATING_INFORMATION. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR's CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THIS SITE.

CREDIT RATINGS ISSUED AND RESEARCH PUBLICATIONS PUBLISHED BY GCR, ARE GCR’S OPINIONS, AS AT THE DATE OF ISSUE OR PUBLICATION THEREOF, OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. GCR DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL AND/OR FINANCIAL OBLIGATIONS AS THEY BECOME DUE. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: FRAUD, MARKET LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND GCR’S OPINIONS INCLUDED IN GCR’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. CREDIT RATINGS AND GCR’S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND GCR’S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL OR HOLD PARTICULAR SECURITIES. NEITHER GCR’S CREDIT RATINGS, NOR ITS PUBLICATIONS, COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. GCR ISSUES ITS CREDIT RATINGS AND PUBLISHES GCR’S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING OR SALE.

Copyright 2019 GCR INFORMATION PUBLISHED BY GCR MAY NOT BE COPIED OR OTHERWISE REPRODUCED OR DISCLOSED, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT GCR’S PRIOR WRITTEN CONSENT. Credit ratings are solicited by, or on behalf of, the issuer of the instrument in respect of which the rating is issued, and GCR is compensated for the provision of these ratings. Information sources used to prepare the ratings are set out in each credit rating report and/or rating notification and include the following: parties involved in the ratings and public information. All information used to prepare the ratings is obtained by GCR from sources reasonably believed by it to be accurate and reliable. Although GCR will at all times use its best efforts and practices to ensure that the information it relies on is accurate at the time, GCR does not provide any warranty in respect of, nor is it otherwise responsible for, the accurateness of such information.GCR adopts all reasonable measures to ensure that the information it uses in assigning a credit rating is of sufficient quality and that such information is obtained from sources that GCR, acting reasonably, considers to be reliable, including, when appropriate, independent third-party sources. However, GCR cannot in every instance independently verify or validate information received in the rating process. Under no circumstances shall GCR have any liability to any person or entity for (a) any loss or damage suffered by such person or entity caused by, resulting from, or relating to, any error made by GCR, whether negligently (including gross negligence) or otherwise, or other circumstance or contingency outside the control of GCR or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits) suffered by such person or entity, as a result of the use of or inability to use any such information. The ratings, financial reporting analysis, projections, and other observations, if any, constituting part of the information contained in each credit rating report and/or rating notification are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. Each user of the information contained in each credit rating report and/or rating notification must make its own study and evaluation of each security it may consider purchasing, holding or selling. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY GCR IN ANY FORM OR MANNER WHATSOEVER.