Announcements

GCR upgrades FirstRand Bank Limited’s rating to AA+(ZA); Outlook Stable.

Johannesburg, 28 November 2017 – Global Credit Ratings has upgraded the long term national scale rating of FirstRand Bank Limited to AA+(ZA) and affirmed FirstRand Bank Limited’s short term national scale rating of A1+(ZA); with the outlook accorded as Stable. Furthermore, Global Credit Ratings has affirmed the long-term international scale local currency rating assigned to FirstRand Bank Limited of BB+; with the outlook accorded as Negative.

SUMMARY RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit ratings to FirstRand Bank Limited (“FRB”, “the bank”) based on the following key criteria:

The upgrade of FRB’s ratings reflects its strengthened domestic market position (being one of the largest banks in South Africa) and its status as a systemically important bank. The ratings also factor in the bank’s solid financial profile despite a challenging economic climate and consequent weakening credit environment, strong risk management framework, and its strong capitalisation and Basel III liquidity metrics that have been maintained above regulatory levels over the review period.

FRB’s competitive position has strengthened over the years to emerge as South Africa’s second largest bank by total assets (21.2% market share). The bank’s retail and commercial franchise, First National Bank (“FNB”), FRB’s largest contributor of earnings and total assets, has grown on the back of a broad and competitive customer offering that provides innovative financial products.

The bank’s capital position remains strong, with risk-weighted capital adequacy ratios (“CAR”) remaining well above both regulatory minima and internal targets. FRB’s total CAR and Tier 1 CAR were 17.3% and 14.3% respectively at FY17. During FY17, the bank issued approximately R2.3bn Basel III compliant Tier 2 domestic instruments, as it continues to actively manage its capital composition to compensate for the previous haircut applied to Basel III non-compliant Tier 2 instruments. FRB also emphasizes the monitoring of the Basel III leverage ratio and the interplay between capital and leverage.

Deteriorating macroeconomic conditions in South Africa have led FRB to reduce its risk appetite. The bank maintains stringent underwriting standards, rigorous post-disbursement monitoring and strong recovery procedures. Consequently, credit originations grew by a modest 5% in FY17. The gross non-performing loan (“NPL”) ratio decreased slightly to 2.3%, while total provision coverage of NPLs increased to 80.3% (FY16: 78.2%).

FRB has shown resilient earnings performance driven mainly by FNB’s solid revenue growth on the back of ongoing customer gains, growth in transactional volumes, and high quality net interest income growth. Net interest income adjusted for impairment provisions grew by 4% (5.1% unadjusted for impairments) in FY17, underpinned by good growth in deposits and positive endowment driven by higher average interest rates. The bank’s pre-tax earnings grew by 6.5% to R25bn in FY17 from R23.6bn in FY16. In line with the continuous cost containment measures, the bank’s cost ratio improved slightly to 54.1% (FY16: 54.2%). Normalised ROaE and ROaA decreased marginally to 22.2% (FY16:23.0%) and 1.7% (FY16:1.8%) respectively, albeit remaining higher than reported by peers.

FRB’s Liquidity Coverage Ratio increased to 105% at FY17(FY16: 102%), exceeding the 100% minimum required from 2019. FRB has strategies in place to increase funding from deposits and decrease reliance on institutional funding sources, which are less efficient. The bank expects to be fully compliant with the Net Stable Funding Ratio full implementation minimum requirements by 2018.

The maintenance of healthy asset quality indicators, sound capitalisation and steady earnings may have a positive impact on the stability of the bank’s ratings. The national scale ratings will be sensitive to a deterioration in asset quality, long-term earnings prospects and capital/liquidity from current levels. Furthermore, the international scale rating will be sensitive to changes in the sovereign rating of the country.

NATIONAL SCALE RATINGS HISTORY   INTERNATIONAL SCALE RATING HISTORY
Initial rating (December 2010)   Initial rating (November 2013)
Long-term: AA(ZA); Short-term: A1+(ZA)   Long term (International LC): BBB
Outlook: Stable   Outlook: Stable
     
Last rating (November 2016)   Last rating (May 2017)
Long-term: AA(ZA); Short-term: A1+(ZA)   Long-term (International LC): BB+
Outlook: Stable   Outlook: Negative

ANALYTICAL CONTACTS    
     
Primary Analyst
Simbarake Chimutanda
Credit Analyst

(011) 784-1771

simbarakec@globalratings.net

  Committee Chairperson
Jennifer Mwerenga

Senior Credit Analyst

(011) 784-1771
jennifer@globalratings.net

Secondary Analyst

Thandolwenkosi Mkwanazi

Junior Credit Analyst

(011) 784-1771

thandolwenkosi@globalratings.net

   
     

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Global Criteria for Rating Banks and Other Financial Institutions, updated March 2017

South Africa Bank Statistical Bulletin (June 2017)

FRB rating reports (2010-17)

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 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; c.) such ratings were an independent evaluation of the risks and merits of the rated entity; and d.) the validity of the ratings are for a maximum of 12 months, or earlier as indicated by the applicable credit ratings document.

The ratings above are unsolicited and accorded based on publicly available information.

Standard Bank of South Africa Limited did not participate in the rating process, though GCR is satisfied that the public information available was sufficient.

The information used to analyse FirstRand Bank Limited and accord the credit ratings included:

  • Audited financial results as at 30 June 2017 (and four years of comparative numbers);
  • Banking sector information (as supplied in the BA900 Reserve Bank of South Africa reports);
  • Industry comparative data; and
  • Other publicly available information.

GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S “SECTOR” GLOSSARY

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.
Basel Basel Committee on Banking Supervision housed at the Bank for International Settlements.
Basel I Basel Committee regulations, which set out the minimum capital requirements of financial institutions with the goal of minimising credit risk.
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.
Cost Ratio The ratio of operating expenses to operating income. Used to measures a bank’s efficiency.
Haircut The percentage by which the market value of a security used as collateral for a loan is reduced. The size of the haircut reflects the expected ease of selling the security and the likely reduction necessary to realised value relative to the fair value.
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.
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.
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.
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 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.
Performing Loan A loan is said to be performing if the borrower is paying the interest on it on a timely basis.
Provision The amount set aside or deducted from operating income to cover expected or identified loan losses.
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.
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.
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.
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.
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 detailed glossary of terms utilised in this announcement please click here

GCR upgrades FirstRand Bank Limited’s rating to AA+(ZA); Outlook Stable.

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