Announcements Financial Institutions Rating Alerts

GCR upgrades African Banking Corporation of Zimbabwe’s national scale issuer ratings to BBB(ZW)/A3(ZW) Outlook Stable

Rating Action

Johannesburg, 29 September 2021 – GCR Ratings (“GCR”) has upgraded African Banking Corporation of Zimbabwe’s national scale long and short-term issuer ratings to BBB(ZW)/A3(ZW) from BB+(ZW)/B(ZW), with outlook accorded as Stable.

Rated Entity / Issue

Rating class

Rating scale

Rating

Outlook / Watch

African Banking Corporation of Zimbabwe

Issuer Long Term

National

BBB(ZW)

Stable Outlook

Issuer Short Term

National

A3(ZW)

Rating Rationale

The upgrade on African Banking Corporation of Zimbabwe’s (‘BancABC Zimbabwe’, ‘the Bank’) ratings is supported by a sustained increase in capitalisation, improved asset quality, robust liquidity, and a modest improvement in market position. The ratings are constrained by the limited scale & diversification and weaker franchise versus top tier peers. The outlook is stable as we do not anticipate significant changes to the credit profile over the ratings horizon.

The modest gain in market share alongside improving product diversification is viewed positively. The Bank’s share of industry assets increased to 4% while share of deposits remained somewhat flat at 3% in FY20, ranking 8th and 6th respectively out of 19 banks. BancABC Zimbabwe, traditionally corporate banking focused but with a growing retail business, has demonstrated penetration in markets of mid-tier local corporates and public sector institutions. However, the high cost of funds suggest the Bank pays above market average for deposits reflecting a weaker franchise versus peers, although we think its ownership by foreign shareholders provides some stability to the franchise. Positively, revenue stability is good supported by a significant contribution of non-funded income to operating revenues.

Capitalisation is ratings positive. Tier 1 capital ratio of c.38% as at FY20 is considered very strong and we expect the ratio to hold above the current level over the next 12-18 months despite the volatility in earnings coming through frequent repricing of monetary assets/liabilities and potentially from other market sensitive income streams. Core earnings are good, with the Bank returning between 7% and 11% of assets over the last 2 years. We expect earnings to trend broadly in line with sector average. The Bank currently holds nominal capital of USD41m equivalent which already exceeds the regulatory minimum capital of USD30m required by year end.

Risk position is ratings neutral. Non-performing loans (‘NPLs’) have improved from historical levels registering 1.5% at FY20, while cost of risk doubled to c.3%, although remain low and compares well to peers. We expect to see limited deterioration in the Bank’s credit counterparties over the next 12-18 months as stability in operating environment gradually improves. Therefore, cost of risk is likely to remain somewhat stable. Unsecured lending is moderate at 37% of the book at FY20 and compares favourably to some top tier peers, while top 20 loan concentrations is low at 33% over the same period. Limited foreign currency lending also benefits the Bank’s risk position.

Funding and liquidity is ratings positive. The assessment balances a weaker funding structure versus peers and the robust levels of liquidity. Funding structure comprises confidence sensitive corporate and public institutions deposits that have a relatively high cost of funds. Offsetting this, liquidity is kept at a very strong level, reflected in the liquid assets coverage of customer deposits of over 159% at FY20. Liquidity support is derived from the short-term maturity profile of the loan book with c.72% of the facilities having a repayment term of less than 3 months and a small quantum of arrears and NPLs supports a high cash conversion rate. Furthermore, the Bank maintains a long position on FX and thus FX liquidity coverage ratio is kept at more than 100%.

Outlook Statement

The outlook is stable, as we do not anticipate changes in the credit profile over the ratings horizon. This is also supported by gradual stabilisation in the operating environment.

Rating Triggers

An upgrade may result from sustained lower NPLs and credit losses, limited volatility in earnings from repriced monetary assets and gain in market share that improves business diversification. The downside to ratings is limited, although higher than anticipated credit losses, weakening capitalisation metrics, and increased volatility in earnings could result in a negative rating migration.

Analytical Contacts

Primary analyst

Simbarake Chimutanda

Financial Institutions Analyst

Johannesburg, ZA

SimbarakeC@GCRratings.com

+27 11 784 1771

     

Committee chair

Matthew Pirnie

Group Head of 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, August 2021

GCR Financial Institutions Sector Risk Score, September 2021

Ratings History

African Banking Corporation of Zimbabwe

Rating class

Review

Rating scale

Rating

Outlook

Date

Long term issuer

Initial

National

BBB-(ZW)

Stable

December 2004

Short term issuer

Initial

National

A3(ZW)

December 2004

Long term issuer

Last

National

BB+(ZW)

Stable

July 2020

Short term issuer

Last

National

B(ZW)

July 2020

Risk score summary

Rating Components & Factors

Risk scores

 

 

Operating environment

1.00

Country risk score

0.00

Sector risk score

1.00

   

Business profile

(1.50)

Competitive position

(1.50)

Management and governance

0.00

   

Financial profile

4.00

Capital and Leverage

3.00

Risk

0.00

Funding and Liquidity

1.00

   

Comparative profile

0.00

Group support

0.00

Government support

0.00

Peer analysis

0.00

   

Total Score

3.50

Glossary

Balance Sheet

Also known as Statement of Financial Position. A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been financed.

Capital

The sum of money that is invested to generate proceeds.

Cash

Funds that can be readily spent or used to meet current obligations.

Debt

An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.

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.

Exposure

Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For a company, its exposure may relate to a particular product class or customer grouping. Exposure may also arise from an overreliance on one source of funding. In insurance, it refers to an individual or company’s vulnerability to various risks

Issuer

The party indebted or the person making repayments for its borrowings.

Leverage

With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.

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 Rating

See GCR Rating Scales, Symbols and Definitions.

Market

An assessment of the property value, with the value being compared to similar properties in the area.

Maturity

The length of time between the issue of a bond or other security and the date on which it becomes payable in full.

Rating Outlook

See GCR Rating Scales, Symbols and Definitions.

Short Term Rating

See GCR Rating Scales, Symbols and Definitions.

Short Term

Current; ordinarily less than one year.

SALIENT POINTS OF ACCORDED RATINGS

GCR affirms that a.) no part of the ratings 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 entity.

The ratings of the following entities were solicited by, or on behalf of, the rated entities, and therefore, GCR has been compensated for the provision of the ratings.

African Banking Corporation of Zimbabwe participated in the rating process via virtual 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 ratings included:

  • Audited financial results as at 31 December 2020;
  • 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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