Johannesburg, 27 August 2015 — Global Credit Ratings has today upgraded Ecobank Zimbabwe Limited’s national scale long term rating to BBB-(ZW) and affirmed the national scale short term rating of A3(ZW), with the outlook accorded as Stable. The rating(s) are valid until August 2016.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating(s) to Ecobank Zimbabwe Limited (“Ecobank Zimbabwe”, “the bank”) based on the following key criteria:
The ratings of Ecobank Zimbabwe reflect its strong brand, improved profitability over the review period, adequate capitalisation and acceptable risk management systems, offset by heightened credit and liquidity risks, as well as the bank’s insignificant market position.
Ecobank Zimbabwe’s ratings are underpinned by strong financial and technical support provided by its parent company, Ecobank Transnational Incorporated (“ETI”), and synergistic benefits attained from group affiliates. With the support of ETI, the bank has transformed from merchant banking to a commercial bank, resulting in a steady improvement in financial performance, and marginal growth in market share.
A risk-based onsite examination of Ecobank Zimbabwe was carried out by the Reserve Bank of Zimbabwe in March 2015. The composite ‘CAMELS’ rating assigned to the bank was ‘2 – satisfactory’.
The bank’s core capital of USD43m at 1H F15, which is mainly backed by cash injections from ETI, was above the minimum regulatory requirement of USD25m for commercial banks. Similarly, the bank’s risk-weighted capital adequacy ratio of 26.6% remained comfortably above the regulatory minimum (12%) at 1H F15, providing some capital cushion for loss absorption.
The bank’s gross non-performing loan ratio of 8.2% at 1H F15 (FYE14: 6.7%; FYE13: 6.0%), which compared favourably to the industry average (13.2%), was above its internal benchmark of 7.0%.
Concentration risk in the bank’s loan portfolio is considered very high, heightening default risk. The bank’s 20 largest exposures accounted for 75.5% of total loans at FYE14.
The bank’s earnings performance has progressively improved from an after-tax loss of USD5.9m in F11 (F12: USD0.3m; F13: USD1.4m) to an after-tax profit of USD2.5m in F14.
Given the composition of its deposit base (which is predominately made up of volatile demand deposits), high depositor concentration, negative liquidity gaps and low levels of liquid assets, the bank’s liquidity risk is heightened. Moreover, the bank’s prudential liquidity ratio of 24.9% at FYE14 was below the regulatory minimum of 30%.
The appropriate deployment of capital/funding, a sustained positive earnings trend, improvement in asset quality and liquidity metrics, and strengthening of the bank’s position in the market, could lead to upward ratings migration. A weakened shareholder support floor will negatively affect the ratings. Furthermore, the ratings may be impacted by deterioration in credit quality, long-term earnings and/or capitalisation, as well as adverse developments in indigenisation policies or their application.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (Jul/2005)|
|Long term: BB+(ZW); Short term: A3(ZW)|
|Last rating (Aug/2014)|
|Long term: BB+(ZW); Short term: A3(ZW)|
|Sector Head: Financial Institution Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2015
Zimbabwe Bank Statistical Bulletin (June 2015)
Ecobank Zimbabwe rating reports (2005-14)
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 rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
Ecobank Zimbabwe Limited 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 rating/s has been disclosed to Ecobank Zimbabwe Limited with no contestation of the rating.
The ratings above were solicited by, or on behalf of, Ecobank Zimbabwe Limited, and therefore, GCR has been compensated for the provision of the ratings.
The information received from Ecobank Zimbabwe Limited and other reliable third parties to accord the credit rating/s included:
- Audited financial results of the bank as at 31 December 2014 (plus four years of comparative numbers);
- Unaudited interim results of the bank as at 30 June 2015;
- Budgeted financial statements for 2015;
- Latest internal and/or external audit report to management;
- Reserving methodologies;
- A breakdown of facilities available and related counterparties;
- Corporate governance and enterprise risk framework;
- Capital management policy; and
- Industry comparative data and regulatory framework.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S FINANCIAL INSTITUTIONS GLOSSARY
|Asset||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|Asset Quality||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 (i.e. being paid back in accordance with their terms) and the likelihood that they will continue to perform.|
|Audit Report||An audit report is a written opinion of an auditor (attesting to the financial statements’ fairness and compliance with generally accepted accounting principles).|
|Balance Sheet||Also known as a 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.|
|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|CAMEL||The acronym for the mainstream approach to credit analysis of financial institutions, referring to the five core elements of any credit assessment: Capital Adequacy, Asset Quality, Management (Competency), Earnings (Profitability) and Liquidity (Funding).|
|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||Corporate governance broadly 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||An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.|
|Credit Rating Agency||An entity that provides credit rating services.|
|Credit Risk||The possibility that a bond issuer or any other borrowers (including debtors/creditors) will default and fail to pay the principal and/or interest when due.|
|Creditworthiness||An assessment of a debtor’s ability to meet debt obligations.|
|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.|
|Demand Deposit||A deposit of funds that can be withdrawn without any advance notice, or “on demand”.|
|Exchange||A standardised marketplace in which different assets are traded.|
|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.|
|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.|
|Fraud||The unlawful and intentional making of a misrepresentation which causes actual and or potential prejudice to another.|
|Income Statement||A summary of all the expenditure and income of a company over a set period.|
|Insolvent||When an entity’s liabilities exceed its assets.|
|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.|
|Interest Rate||The charge or the return on an asset or debt expressed as a percentage of the price or size of the asset or debt. It is usually expressed on an annual basis.|
|Lease||Conveyance of land, buildings, equipment or other assets from one person (lessor) to another (lessee) for a specific period of time for monetary or other consideration, usually in the form of rent.|
|Liabilities||All financial claims, debts or potential losses incurred by an individual or an organisation.|
|Liquid Assets||Assets, generally of a short term, that can be converted into cash.|
|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.|
|Liquidity Risk||The risk that a company may not be able to meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets. Regarding securities, the risk that a financial instrument cannot be traded at its market price due to the size, structure or efficiency of the market.|
|Long term||Not current; ordinarily more than one year.|
|Long Term Rating||A 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.|
|Margin||The rate taken by the lender over the cost of funds, which effectively represents the entity’s profit and remuneration for taking the risk of the loan; also known as spread.|
|National Scale Rating||The national scale 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.|
|Non-Performing Loan||When a borrower is overdue, typically 90+ days in arrears or as defined by the lender, or in the transaction documents.|
|Off Balance Sheet||Off balance sheet items are assets or liabilities that are not shown on a company’s balance sheet. They are usually referred to in the notes to a company’s accounts.|
|Performing Loan||A loan is said to be performing if the borrower is paying the interest on it on a timely basis.|
|Portfolio||A collection of investments held by an individual investor or financial institution. They may include stocks, bonds, futures contracts, options, real estate investments or any item that the holder believes will retain its value.|
|Principal||The total amount borrowed or lent, e.g. the face value of a bond, excluding interest.|
|Provision||The amount set aside or deducted from operating income to cover expected or identified loan losses.|
|Redemption||The repurchase of a bond at maturity by the issuer.|
|REPO||In a REPO one party sells assets or securities to another and agrees to repurchase them later at a set price on a specified date.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|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.|
|Securities||Various instruments used in the capital market to raise funds.|
|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.|
|Shareholder||An individual, entity or financial institution that holds shares or stock in an organisation or company.|
|Short Term||Current; ordinarily less than one year.|
|Short Term Rating||A short term rating is an opinion of an issuer’s ability to meet all financial obligations over the upcoming 12 month period, including interest payments and debt redemptions.|
|Solvent||The state of a company where its assets exceed its liabilities and it is able to service its debt and meet its other obligations, especially in the long-term.|
For a detailed glossary of terms utilised in this announcement please click here