Johannesburg, 24th October 2019 – GCR Ratings (“GCR”) has revised the long and short-term Zimbabwean national scale ratings of Ecobank Zimbabwe Limited to A(ZW) /A1(ZW) respectively. At the same time, the ratings have been taken off Negative Ratings Watch and the outlook accorded as Stable.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook|
|Ecobank Zimbabwe Limited||Issuer Long Term||National||A(ZW)||Stable Outlook|
|Issuer Short Term||National||A1(ZW)||—|
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, the ratings were placed ‘Under Criteria Observation’. Subsequently, GCR has finalised the review under the new methodology. As a result, the ratings have been removed from ‘Under Criteria Observation’ and the ratings reviewed in line with the new methodology.
The ratings reflect the bank’s operating environment, increasing market share by deposit and better than average franchise strength demonstrated by low cost of funds of 0.13% at 30 June 2019. The ratings also factor in reasonably sound levels of capitalisation, a modest risk position and adequate funding and liquidity. Lastly, the ratings benefit from ongoing support and integration of the bank with its ultimate parent, Ecobank Transactional Incorporated.
Republic of Zimbabwe, Country Risk Score: 0
The Zimbabwean country risk score of ‘0’, reflects the ongoing sovereign default, weak fiscal and monetary track-record, high inflation, and the risk of rapid currency devaluation. GCR note the efforts made by the Minister of Finance to improve the fiscal position of the government and give credence to the local currency. However, the impact on hyperinflation and economic growth will be stark in 2019, challenging political will.
Republic of Zimbabwe, Financial Institutions Sector Risk Score: 1
Zimbabwe’s financial institutions sector risk of ‘1’ is restrained by severe currency fluctuations, volatile monetary policy, long-term weak fiscal position of the government and high through the cycle industry wide weak asset quality. Regulation is broadly in line with the regional average. The sector is somewhat fragmented, which has created stiff competition, but the banks are generally profitable and adequately capitalised. Funding is largely deposit based, spread between corporate and retail deposits. However, there can be large concentrations in the funding base.
Ecobank Zimbabwe Limited
At 30 June 2019, the bank’s market share of deposits increased to 12% from 8.3% at 31 December 2018. Continuous decline on cost of funds reflects increasing franchise strength benefiting from its position within the wider group. At 30 June 2019, cost of funds were 0.13% from 0.33% at 31 December 2018. While retail product diversification is not great, the bank has dominance perhaps a defendable position in its niche in trading finance/ structured finance which is considered an added advantage over peers.
Capitalisation is considered to be sound, coupled by strong internal capital generation. However, GCR notes market sensitive income primarily in the form of trading gains off-set by translation losses was the main contributor to operating revenue at 30 June 2019 (71%) from 14.8% at FY18. This is considered a ratings negative. GCR notes the advantage of generating foreign currency earnings in an economy with foreign currency challenges.
The risk position is currently viewed to be neutral to the ratings. The gross non-performing loan ratio increased further to 6.3% at 30 June 2019 from 4.7% at FY18 (FY17: 2.4%). While on-balance sheet asset quality is deteriorating, the bulk of asset exposure is off-balance sheet in the form of LCs and is cash covered reducing risk. The bank registered low credit losses of 0.6% at 30 June 2019. Foreign currency risk is considered low. The bank had a positive position at 30 June 2019.
Funding and liquidity are considered to be adequate. The funding structure is broadly comparable to peers, with the bulk of funding arising from customer deposits. However, the lack of diversification in funding source is a ratings negative. At 30 June 2019, corporates constitute the bulk of customer deposits with a high sectorial concentration towards trade and services (65%) exposing the bank to external shocks considering the relative volatility of corporate deposits. Liquidity is considered adequate and off-sets the high funding concentration somewhat. Adequate liquidity is supported by a GCR liquid assets to customer deposits ratio of 75.8% at 30 June 2019 and 48% at 31 December 2018. The bank is sufficiently covered in all the currencies.
The Stable outlook balances the risks from significant lending and funding concentrations in a highly volatile economy with the sound earnings, liquidity and capital of the bank. We also factor in the ongoing currency fluctuations and long-term political vulnerabilities.
Due to the currently strained operating environment, GCR considers there to be limited upward ratings potential over the ratings horizon. A negative rating action may follow further deterioration in the risk position, sustained concentrations in the funding profile. Sustained strong capitalisation, risk and funding diversification will entrench the ratings.
|Primary analyst||Vimbai Muhwati||Financial Institutions Analyst|
|Johannesburg, ZA||VimbaiM@GCRratings.com||+27 11 784 1771|
|Committee chair||Patricia Zvarayi||Deputy Sector Head: Corporate Ratings|
|Johannesburg, ZA||Patricia@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, July 2019|
Ecobank Zimbabwe Limited
|Rating class||Review||Rating scale||Rating class||Outlook/Watch||Date|
|Issuer Long Term||Initial||National||BB+(zw)||Positive||July 2005|
|Last||National||BBB(zw)||Rating Watch Negative||May 2019|
|Issuer Short Term||Initial||National||A3(zw)||–||July 2005|
RISK SCORE SUMMARY
|Country risk score||0.0|
|Sector risk score||1.0|
|Management and governance||0.0|
|Capital and Leverage||1.0|
|Funding structure and Liquidity||0.5|
|Asset/Assets||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|Capital||The sum of money that is invested to generate proceeds.|
|Capitalisation||The provision of capital for a company, or the conversion of income or assets into capital.|
|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.|
|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.|
|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.|
|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 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.
The credit ratings have been disclosed to Ecobank Zimbabwe Limited. The ratings above were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings.
Ecobank Zimbabwe Limited 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 Ecobank Zimbabwe Limited and other reliable third parties to accord the credit rating included:
- Audited financial results of Ecobank Zimbabwe Limited as at 31 December 2018;
- Unaudited interim financial results at 30 June 2019;
- A breakdown of facilities available and related counterparties 2018; and
- Industry comparative data.