Johannesburg, 19 October 2020 – GCR Ratings (“GCR”) has upgraded Ecobank Zimbabwe Limited’s national scale long term issuer rating to A+(ZW) from A(ZW). The short-term national scale issuer rating was affirmed at A1(ZW). The Outlook is Stable.
|Rated Entity||Rating class||Rating scale||Rating||Outlook/Watch|
|Ecobank Zimbabwe Limited||Long Term issuer||National||A+(ZW)||Stable Outlook|
|Short Term issuer||National||A1(ZW)|
The upgrade on Ecobank Zimbabwe Limited (“Ecobank Zimbabwe”) reflects the bank’s sound financial profile relative to rated peers in the adverse operating environment. The ratings also reflect a sound business profile, supported by above average franchise strength, good levels of business diversification, low cost of funds, and a track record of revenue stability. Furthermore, the ratings take into account adequate capitalisation, good internal capital generation, relatively stable funding structure and good liquidity. The outlook is restrained by the hyperinflationary environment, adverse unquantified ramifications of the on-going COVID-19 pandemic and unstable operating environment.
The business profile is a ratings positive. The bank has a sound competitive position in comparison to rated peers reflected by 1) dominance perhaps a defendable niche in trade finance/ structured finance and 2) lower cost of funds of below 0.5% in line with top tier industry peers. While retail product diversification is not great, the core strength of the bank lies in its trade finance/ structured finance business, considered an added advantage over peers. Franchise strength also benefits from a blue chip corporate loan book. Revenue stability is broadly in-line with banking sector peers, but with an increasing dependency on market sensitive income. In the above consideration, GCR takes into account the valuation risk of monetary assets in a hyperinflationary environment.
We consider the bank to be adequately capitalised, supported by strong internal capital generation moderated for increasing reliance on market sensitive income and concentration of income sources. The bank had a modest GCR leverage ratio of 5.8% at 30 June 2020 and high reserve coverage of Stage 2 and 3 loans. Market sensitive income in the form of foreign exchange income accounted for 66% of operating revenues at 30 June 2020 exposing the bank to revenue stability risk. Internal capital generation is good and growth in foreign currency (“FX”) income (in an economy with foreign currency challenges) is viewed positively.
The risk position is neutral to the ratings. Credit losses increased to 5.2% at 30 June 2020 from 1.7% at 31 December 2019. Asset quality metrics have deteriorated on the back of the heightened credit risk in the aftermath of lockdown restrictions and ongoing COVID-19. On-balance sheet credit concentration is very high. While on-balance sheet asset quality is deteriorating, the bulk of asset exposure is off-balance sheet in the form of guarantees and letters of credit which were 100% cash covered somewhat mitigating risk. The concentration risk is mitigated by more than adequate reserving (5x at 30 June 2020) and the bank’s strong underwriting evidenced by the stage 3 loans (0.6% at 30 June 2020 (FY19: 1.8%)). However, the bank is not be immune to the sector wide challenges which include possibility of increasing defaults and lower collections on foreign currency loans.
Funding and liquidity is ratings positive taking into account a sound funding structure and good liquidity. The GCR stable funding ratio and long term funding ratios for the bank were modest at 59.9% and 96.5% respectively at 30 June 2020. However, the bank had relatively high single name concentrations. Therefore, the bank remains susceptible to external shocks, further exacerbated by the challenging operating environment and sector wide foreign currency shortages. However, the FX book has more resilience due larger correspondent bank balances, which provide more cover when compared to the total deposits. Furthermore, liquidity is good mitigating structural funding risks. At 30 June 2020, the GCR liquid asset coverage of customer deposits was high in the range of 100% to 105%.
The ratings benefit from support and integration of the bank with its ultimate parent, Ecobank Transnational Incorporated (“ETI”), although not a material asset or revenue contributor. The bank is controlled by Ecobank Zimbabwe Holdings Limited (incorporated and domiciled in Zimbabwe), which owns 100% of the ordinary shares. Ecobank Zimbabwe Holdings Limited is a subsidiary of ETI.
The outlook is Stable, balancing our expectation that Ecobank Zimbabwe will maintain a sound financial profile supported by high internal capital generation and adequate levels of liquidity against the turbulent operating environment.
National scale ratings reflect relativities to the local Zimbabwean peers only. Given the adverse operating environment there is implied volatility in the ratings. A positive or negative ratings movement could follow a change in capitalisation, asset quality or liquidity.
|Primary analyst||Vimbai Muhwati||Financial Institutions Analyst|
|Johannesburg, ZA||VimbaiM@GCRratings.com||+27 11 784 1771|
|Committee chair||Corné Els||Senior Structured Finance & Securitisation Analyst|
|Johannesburg, ZA||CorneE@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 Scales, Symbols & Definitions, May 2019|
|GCR Country Risk Scores, May 2020|
|GCR Financial Institutions Sector Risk Score, August 2020|
|Jurisdictional Supplement for Criteria, July 2020|
Ecobank Zimbabwe Limited
Risk Score Summary
|Rating Components & Factors||Risk Scores|
|Country risk score||0.00|
|Sector risk score||1.00|
|Management and governance||0.00|
|Capital and Leverage||1.00|
|Funding and Liquidity||1.00|
|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|
|Income||Money received, especially on a regular basis, for work or through investments.|
|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.|
|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.|
|Margin||A term whose meaning depends on the context. In the widest sense, it means the difference between two values.|
|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.|
|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 Rating||See GCR Rating Scales, Symbols and Definitions.|
|Short Term||Current; ordinarily less than one year.|
SALIENT POINTS OF ACCORDED RATING
GCR affirms that a.) no part of the rating process 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 Ecobank Zimbabwe Limited. The rating above was 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 video conference 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 ratings included:
- The audited financial results to 31 December 2019
- Unaudited management accounts as at 30 June 2020
- Breakdown of facilities
- Banking sector information and Industry comparative data
- Other related documents.
Due to severe foreign currency shortages, hyperinflation and significant monetary and exchange control policy changes over the last 12-18 months in our opinion, the national scale credit ratings on Zimbabwean entities are not directly comparable to credit ratings and risk scores within other markets. Furthermore, outlook statements may fail to capture forward looking trends due to the extreme volatility in the operating environment and audited opinions. See the latest Jurisdictional Supplement for Criteria, published July 2020.