Announcements Financial Institutions Rating Alerts

GCR reviews five Zimbabwean financial institutions under the new criteria

Rating Action    

Johannesburg, 5th August 2019 – GCR Ratings (“GCR”) has reviewed the ratings on five Zimbabwean financial institutions under the recently released Criteria for Rating Financial Institutions, May 2019.

On May 22, 2019 GCR announced that it had released new criteria for all banks and bank-like entities. This methodology is titled Criteria for Rating Financial Institutions. As a result, all affected ratings were placed ‘Under Criteria Observation’.

Subsequently, GCR has finalised the second wave of reviews under the new methodology. As a result, the ratings below have been removed from ‘Under Criteria Observation’ and the ratings reviewed in line with the new methodology.

The following financial institutions were included in this review:

  1. First Capital Bank Zimbabwe Limited: long and short-term Zimbabwean national scale ratings have been affirmed at A+(ZW)/A1(ZW). At the same time, the ratings have been taken off Negative Ratings Watch and the outlook accorded as Stable.
  • NMB Bank Limited: long and short-term Zimbabwean national scale ratings placed on selective default ‘SD’ and directly afterwards revised to BB-(ZW)/B(ZW). At the same time, the ratings have been taken off Negative Ratings Watch and the outlook accorded as Negative.
  • Standard Chartered Bank Zimbabwe Limited: long and short-term Zimbabwean national scale ratings revised to AA(ZW)/A1+(ZW) from AA-(ZW)/A1+(ZW). At the same time, the ratings have been taken off Negative Ratings Watch and the outlook accorded as Stable.
  • ZB Bank Limited: long and short-term Zimbabwean national scale ratings affirmed at BB(ZW)/B(ZW). At the same time, the ratings have been taken off Negative Ratings Watch and the outlook accorded as Stable.
  • ZB Building Society: long and short-term Zimbabwean national scale ratings revised to B-(ZW)/B(ZW) from
    BB-(ZW)/B(ZW). At the same time, the ratings have been taken off Negative Ratings Watch and the outlook accorded as Stable.

Rating Rationale

The ratings on the five reviewed financial institutions reflect the following:

First Capital Bank Zimbabwe Limited

The A+(ZW)/A1(ZW) national scale ratings on First Capital Bank Zimbabwe Limited (“FCB Zimbabwe” or “FCB”), are based on the analysis of FCB Zimbabwe on a stand-alone basis. Whilst the bank operates within, and is supported by, the Mauritius listed and Malawi headquartered FMBcapital group, we consider FCB’s contribution to the wider group to be limited since the significant and ongoing devaluation of the Zimbabwean local currency. We currently estimate that FCB contributes approximately 5%-10% of wider group loans.

The ratings are supported by FCB’s above average franchise within the Zimbabwean banking industry, fairly good business line diversification, with retail & business banking and corporate & investment banking lines contributing 62% and 38% of net income respectively as of December 31st 2018, alongside a good history of revenue stability and low funding costs.

The sound capital position of the bank also supports the rating. As of December 31st 2018, the bank had a GCR total capital ratio of 23%. We also consider the loan loss reserving and earnings to be broadly supportive of the rating level. Funding and liquidity are also sound, with diversified and low-cost funds and strong levels of liquidity. As of December 31st 2018, broad liquid assets covered 53% of total deposits. The risk position is a neutral ratings factor balancing better than average non-performing loans and credit losses with high lending concentrations. The top twenty loans contributed 70% of total loans at December 31st 2018.

Outlook Statement

The Stable outlook balances the risks of a diminishing franchise, due to the pending removal of the Barclay’s Bank association, and the significant lending concentrations in a highly volatile economy with the good earnings, liquidity and capital of the bank. We also factor in the ongoing currency fluctuations and long-term political vulnerabilities.

Rating Triggers

A downgrade could arise from a weakening in the franchise, resulting in increased cost of funding and loss of market share, as well as a lowering of quality and sustained concentrations in the loan book. An improvement in the group credit profile and FCB’s position within it, could also raise the ratings. However, due to the currently strained operating environment, we consider there to be limited upward ratings potential over the ratings horizon.

NMB Bank Limited

In the first quarter of 2019, NMB Bank Limited (“NMB”) defaulted on the Nederlandse Financierings-Maatschappij Voor Ontiwikkelingslanden (“FMO”) and Swedfund credit lines, citing foreign currency challenges prevalent in the Zimbabwean operating environment. Furthermore, the bank defaulted on the principal payment with respect to a subordinated loan during the year ended 31 December 2018. In April 2019, the bank had outstanding balances of USD2.3m and USD1.1m owed to FMO and Swedfund respectively. The subordinated loan balance as at 31 December was USD1.5m.

In the monetary policy announcement of February 2019 titled “ESTABLISHMENT OF AN INTER-BANK FOREIGN EXCHANGE MARKET TO RESTORE COMPETITIVENESS” and SI142/9 of June 2019, the banks, as with other legal entities, were required to register all foreign liabilities and legacy debts with the Exchange control and pay the local currency equivalent of the liability which the regulator was assuming at the rate of 1:1. According to management, NMB was able to make this payment to the regulator. NMB sought a 12 months moratorium on the lines of credit to allow the RBZ legacy debt initiative to be finalised and also to allow NMB to build foreign currency revenue under the new monetary policy framework. The proposal for moratorium was accepted by all the lenders.

The BB-(ZW)/BZW) national scale ratings on NMB are based on NMB Holdings Group analysis. NMB is the core operating entity of the NMB Holdings Group. The ratings reflect the bank’s modest market position and franchise strength in the Zimbabwean operating environment and relatively average business diversification. At 31 December 2018, NMB had a market share of c4% of total deposits and c7% of loans and advances. The ratings also factor in adequate capitalisation, supported by a GCR capital ratio of 20.7%, offset by a structurally weaker funding profile, and just sufficient liquidity. The risk position of the bank is broadly in line with the industry average.

Outlook Statement

The negative outlook reflects the constrained liquidity position of the bank, with liquid assets covering approximately 15% of total deposits at Dec 31st, 2018.  We have made the assumption that the Reserve Bank of Zimbabwe will honour the USD payments to FMO and Swedfund going forward. It also balances the ongoing volatility in the local economy, currency fluctuations and long-term political vulnerabilities with the sufficient capitalisation.

Rating Triggers

The ratings could be lowered if capital, liquidity or asset quality metrics deteriorate over the next 12 months. Due to the currently strained operating environment, we consider there to be limited upward ratings potential over the ratings horizon.

Standard Chartered Bank Zimbabwe Limited

The AA(ZW)/A1+(ZW) national scale ratings on Standard Chartered Bank Zimbabwe Limited (“Stanchart Zimbabwe”), balances the bank’s modest market share, against a relatively strong franchise, as evidenced by very low cost of funds of c0.1%. The bank ranks 5th by deposit book size in Zimbabwe, with 7.4% market share at FY18. Furthermore, the ratings factor in high capitalisation, with a GCR total capital ratio of 35% and GCR leverage ratio of 8.4%, market leading low credit losses and sound funding and liquidity albeit with more concentrated deposit book than direct peers. Stanchart Zimbabwe’s ratings benefit from integration and affiliation with the ultimate parent Standard Chartered’s global network.

Outlook Statement

The Stable outlook balances the ongoing volatility in the local economy, currency fluctuations and long-term political vulnerabilities with the robust risk management, high capitalisation and franchise value of the bank.

Rating Triggers

Due the currently strained operating environment, we consider there to be limited upward ratings potential over the ratings horizon. Conversely, a material deteriorating in asset quality could bring the ratings down.

ZB Bank Limited

The BB(ZW)/B(ZW) national scale ratings on ZB Bank Limited (“ZB Bank”), are based on the strengths and weaknesses of the wider ZB Financial Holdings Limited (“ZBHL”) group. ZB Bank is the core operating entity of the ZB Holdings Group, contributing c.71% and c.81% to the Group’s total revenue and assets respectively at 31 December 2018. The ratings reflect the groups relatively average banking market share and franchise strength. As of 31st December 2018, the bank had a market share of 3.9% of deposits and modest cost of funds. The ratings are negatively impacted by the ongoing legal dispute between the Group, Intermarket Holdings Limited (“IHL”) and Transnational Holdings Limited (“THL”). The ratings also factor an adequate capital position supported by a group GCR capital ratio of 19%, despite the undercapitalised building society subsidiary. The risk position is sound, the gross non-performing loans ratio was below the industry average. Funding and liquidity are considered to be neutral for the ratings.

Lastly, the ratings benefit from a modest degree of government support, due the 40% direct and indirect ownership in the bank and ongoing support in the form of efforts to resolve the matter between ZBHL, IHL and THL.

Outlook Statement

The Stable outlook balances the ongoing legal dispute between ZBHL, IHL and THL, volatility in the local economy, currency fluctuations and long-term political vulnerabilities, with currently improving levels of non-performing loans and adequate funding and liquidity.

Rating Triggers

The ratings could be lowered if the GCR capital ratio comes down towards the 15% level. Conversely, a sustained improvement in capitalisation, alongside long-term stable asset quality, could have the opposite impact. However, due to the currently strained operating environment, we consider there to be limited upward ratings potential over the ratings horizon.

ZB Building Society

The B-(ZW)/B(ZW) national scale ratings on ZB Building Society (“ZBBS”) are restrained by the current regulatory forbearance on the entity’s nominally low capital position, and the ongoing legal dispute between the ZB Financial Holdings Limited (“ZBHL”) and Transnational Holdings Limited (“THL”). We also factor in the weak market position, concentrated product offering and relatively modest franchise strength. The building society had the lowest market shares of deposits (c0.2%) and loans and advance (c0.3%) at 31 December 2018, amongst the rated peer group.

The ratings are somewhat supported by the high GCR capital ratio of 42.6%, but this is materially offset by ZBBS’s breach of the nominal regulatory capital requirement of $20m, relatively poor earnings demonstrated by very low return on equity of 2.3% and a very high cost ratio of 86%. The risk position is considered sound. Funding and liquidity are considered to adequate, supported by a GCR liquid assets to customer deposits ratio of 66.6%. Furthermore, group support (from the ZB Holdings Group) was factored into the national ratings, reflecting the shared branding, services and history of support.

Outlook Statement

The Stable outlook balances our opinion that the ongoing legal dispute between ZBHL and THL, and the continued breach of regulatory capital requirements, will not material challenge the liquidity or operations of the entity. We also factor in the inherently high volatility in the local economy, and long-term political vulnerabilities, with adequate funding and liquidity.

Rating Triggers

A reduction in asset quality or liquidity could bring the ratings down, whereas resolving the legal and regulatory threats challenges the building society is key to any positive ratings momentum. However, due to the currently strained operating environment, we consider there to be limited upward ratings potential over the ratings horizon.

Analytical Contacts

Primary analyst Vimbai Muhwati Financial Institutions Analyst
Johannesburg, ZA     vimbaim@GCRratings.com +27 11 784 1771
     
Secondary analyst Thandolwenkosi Mkwanazi Financial Institutions Associate
Johannesburg, ZA     thandolwenkosim@GCRratings.com +27 11 784 1771
     
Committee chair Matthew Pirnie Sector Head: Financial Institutions 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, June 2019
GCR Financial Institutions Sector Risk Score, 23 July 2019

Ratings History

First Capital Bank Zimbabwe Limited*

Rating class Review Rating scale Rating class Outlook/Watch Date
Issuer Long Term Initial National AA-(ZW) Stable September 2000
  Last National A+(ZW) Rating Watch Negative May 2019
Issuer Short Term Initial National A1+(ZW) N/A September 2000
  Last National A1(ZW) Rating Watch Negative May 2019

NMB Bank Limited

Rating class Review Rating scale Rating class Outlook/Watch Date
Issuer Long Term Initial National BBB-(ZW) Stable December 2005
  Last National BBB-(ZW) Rating Watch Negative May 2019
Issuer Short Term Initial National A3(ZW) N/A December 2005
  Last National B(ZW) Rating Watch Negative May 2019

Standard Chartered Bank Zimbabwe Limited

Rating class Review Rating scale Rating class Outlook/Watch Date
Issuer Long Term Initial National AA-(ZW) Stable September 2000
  Last National AA-(ZW) Rating Watch Negative May 2019
Issuer Short Term Initial National A1(ZW) N/A September 2000
  Last National A1+(ZW) Rating Watch Negative May 2019

ZB Bank Limited

Rating class Review Rating scale Rating class Outlook Date
Issuer Long Term Initial National A(ZW) Ratings Watch August 2007
  Last National BB(ZW) Rating Watch Negative May 2019
Issuer Short Term Initial National A1-(ZW) Ratings Watch June 2006
  Last National B(ZW) Rating Watch Negative May 2019

ZB Building Society

Rating class Review Rating scale Rating class Outlook/Watch Date
Issuer Long Term Initial National BBB(ZW) Ratings Watch December 2002
  Last National BB-(ZW) Rating Watch Negative May 2019
Issuer Short Term Initial National A2(ZW) N/A June 2006
  Last National B(ZW) Rating Watch Negative May 2019

*Formerly Barclays Bank of Zimbabwe Limited.

RISK SCORE SUMMARY

Risk score FCB NMB Stanchart Zimbabwe ZB Bank ZBBS
           
Operating environment 1 1 1 1 1
Country risk score 0 0 0 0 0
Sector risk score 1 1 1 1 1
         
Business profile 1 0.5 1 -0.5 -3
Competitive position 1 0.5 1 0 -2.5
Management and governance 0 0 0 -0.5 -0.5
           
Financial profile 1.5 -0.5 2.5 0.5 0
Capital and Leverage 1 0 2 0.5 0
Risk 0 0 0 0 0
Funding structure and Liquidity 0.5 -0.5 0.5 0 0
           
Comparative profile 0.5 0 0.5 0.5 0
Group support 0.5 0 0.5 0 0.5
Government support 0 0 0 0.5 0
Peer analysis 0 0 0 0 0
           
Total Score 4 1 5 1.5 -1.5
           
National Scale Rating A+(ZW)/A1(ZW) BB-(ZW)/B(ZW) AA(ZW)/A1+(ZW) BB(ZW)/B(ZW) B-(ZW)/B(ZW)

Glossary

Benefits Financial reimbursement and other services provided to insureds by insurers under the terms of an insurance contract.
Capital The sum of money that is invested to generate proceeds.
Financial Institution An entity that focuses on dealing with financial transactions, such as investments, loans and deposits.
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. 
Loan A sum of money borrowed by a debtor that is expected to be paid back with interest to the creditor. A debt instrument where immovable property is the collateral for the loan. A mortgage gives the lender a right to take possession of the property if the borrower fails to repay the loan. Registration is a prerequisite for the existence of any mortgage loan. A mortgage can be registered over either a corporeal or incorporeal property, even if it does not belong to the mortgagee. Also called a Mortgage bond.
Market An assessment of the property value, with the value being compared to similar properties in the area.
National Scale Rating National scale ratings measure creditworthiness relative to issuers and issues within one country.
Performing Loan A loan is said to be performing if the borrower is paying the interest on it on a timely basis.
Performing An obligation that performs according to its contractual obligations.
Private An issuance of securities without market participation, however, with a select few investors. Placed on a private basis and not in the open market.
Release An agreement between the creditor and debtor, in terms of which the creditor release the debtor from its obligations.
Risk Management Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy.
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 Current; ordinarily less than one year.

SALIENT POINTS 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 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 entities. The rating above was solicited by, or on behalf of, the rated entities, and therefore, GCR has been compensated for the provision of the ratings.

The entities participated in the rating process via face-to-face 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 rating included:

  • Audited financial results as at 31 December 2018;
  • Management accounts for 2019;
  • Budgeted financial statements for 2019;
  • Latest internal and/or external audit report to management;
  • A breakdown of facilities available and related counterparties; and
  • Industry comparative data.
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