Johannesburg, 29 August 2018 — Global Credit Ratings has upgraded Ecobank Zimbabwe Limited’s long-term and short-term national scale ratings to BBB(ZW) and A2(ZW) respectively; with the outlook accorded as Positive. The ratings are valid until August 2019.
SUMMARY RATINGS RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Ecobank Zimbabwe Limited (“Ecobank”, “the bank”) based on the following factors:
The ratings reflect sustained strong capitalisation, an adequate risk position, adequate funding and liquidity, increasing profitability as well as financial and technical support provided by the parent company, Ecobank Transactional Incorporated (“ETI”, “the group”). However, ratings are constrained by a challenging operating environment and a somewhat non-exceptional, albeit improving market share.
Ecobank’s capitalisation is considered to be strong, supported by healthy internal capital generation and modest dividends. As such, the bank registered a Tier 1 capital adequacy ratio (“CAR”) of 37.7% (FY16: 25.4%) and total CAR of 41.8% (FY16: 28.0%) at FY17, compared with a minimum capital requirement ratio of 12.0%. Given earnings retention coupled with an actively managed risk base, GCR is of the view that the bank will continue to maintain a strong capital cushion over regulatory capital in the next 12 months.
The bank’s risk profile is considered to be adequate, evidenced by good asset quality and sufficient risk control measures in place. While the NPLs ratio increased to 2.4% at FY17 (FY16: 0.5%), the ratio remained below the industry average NPLs ratio of 7.1% at FY17, and in line with management’s target to maintain it below 3.0%, mainly due to write offs of NPLs. Furthermore, the bank sufficiently provides for loss given default. Despite adherence to stringent credit policies, Ecobank’s asset quality is vulnerable given the prevailing challenging operating environment.
Ecobank’s funding profile exhibits stability with deposits (81.9%) as the major source of funding at FY17. However, GCR notes a lack of diversification in the sources of funding, with corporates constituting 75.9% of the deposits and exposing the bank to external shocks considering the relative volatility of wholesale deposits. The bank manages asset-liability maturity mismatches characteristic of the bank’s funding and liquidity profile by maintaining prudent liquidity ratios above both regulatory and internal minima. The ratio of liquid assets to short term funding registered at 79.0% at FY17 (FY16: 37.0%).
The bank’s market share grew over the period under review, attributable to its ability to leverage on the group’s structure and fellow subsidiaries. Resultantly, profitability increased year on year supported by interest income from Treasury Bills, fees from letters of credit and sound cost control. Net profit after tax increased by 123.5% to USD22.2m at FY17 (FY16: USD9.9m) while the bank’s cost to income ratio improved to 39.0% (FY16: 48.3%). Notably, Ecobank has successfully leveraged on off balance sheet commitments (letters of credit) coupled with investments in Treasury Bills. In GCR’s view, the bank will likely sustain its current performance, absent adverse events beyond the control of the bank and the group.
A notable strengthening of the bank’s competitive position and increasing profitability, while maintaining a longer track record of good asset quality, adequate funding and liquidity, and strong capitalisation could trigger a positive rating action. A negative rating action may follow weakened shareholder support coupled with a deterioration in the standalone credit profile.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (July 2005)||Last rating (August 2017)|
|Long term: BB+(ZW); Short term: A3(ZW)||Long term: BBB-(ZW); Short term: A3(ZW)|
|Outlook: Positive||Outlook: Stable|
|Primary Analyst||Secondary Analyst|
|Simbarake Chimutanda||Nyasha Chikwengo|
|Credit Analyst||Credit Analyst|
|(011) 784-1771||(011) 784-1771|
|Sector Head: Financial Institution Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions (March 2017)
Ecobank rating reports (2005-17)
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 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.
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 credit ratings have been disclosed to Ecobank Zimbabwe Limited.
Information received from Ecobank Zimbabwe Limited and other reliable third parties to accord the credit ratings included:
- Audited financial results as at 31 December 2017 (and four years of comparative numbers)
- Unaudited financial results as at 30 May 2018
- Budgeted financial statements for 2018
- Latest internal and/or external audit report to management
- A breakdown of facilities available and related counterparties
- Corporate governance and enterprise risk framework
- Industry comparative data
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.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S FINANCIAL INSTITUTIONS GLOSSARY
|Arrears||An overdue debt, liability or obligation. An account is said to be ‘in arrears’ if one or more payments have been missed in transactions where regular payments are contractually required.|
|Asset||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|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 (ie, being paid back in accordance with their terms) and the likelihood that they will continue to perform.|
|Audit Report||A written opinion of an auditor (attesting to the financial statements’ fairness and compliance with generally accepted accounting principles).|
|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|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.|
|Collateral||Asset provided to a creditor as security for a loan.|
|Corporate Governance||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 Agency||An entity that provides credit rating services.|
|Customer Deposit||Cash received in exchange for a service, including safekeeping, savings, investment, etc. Customer deposits are a liability in a bank’s books.|
|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.|
|Impairment||Reduction in the value of an asset because the asset is no longer expected to generate the same benefits, as determined by the company through periodic assessments.|
|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.|
|International Scale Rating LC||International local currency (International LC) ratings measure the likelihood of repayment in the currency of the jurisdiction in which the issuer is domiciled. Therefore, the rating does not take into account the possibility that it will not be able to convert local currency into foreign currency or make transfers between sovereign jurisdictions.|
|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||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.|
|National Scale Rating||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.|
|Net Profit||Trading/operating profits after deducting the expenses detailed in the profit and loss account (including taxes).|
|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.|
|Provision||The amount set aside or deducted from operating income to cover expected or identified loan losses.|
|Regulatory Capital||The total of primary, secondary and tertiary capital.|
|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.|
|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||An opinion of an issuer’s ability to meet all financial obligations over the upcoming 12 month period, including interest payments and debt redemptions.|
For a full glossary of terms please click here
GCR upgrades Ecobank Zimbabwe Limited’s rating to BBB(ZW); Outlook Positive.