Johannesburg, 9th October 2019 – GCR Ratings (“GCR”) has upgraded the national scale long term issuer rating assigned to Grindrod Bank Limited to A-(ZA) from BBB+(ZA), affirmed the national scale short term issuer rating at A2(ZA), and affirmed the international scale long term issuer rating at B+, with outlooks accorded as Stable.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook / Watch|
|Grindrod Bank Limited||Issuer Long Term||National||A-(ZA)||Stable Outlook|
|Issuer Short Term||National||A2(ZA)||–|
|Issuer Long Term||International||B+||Stable Outlook|
GCR announced that it had released new criteria for rating financial institutions in May 2019. Consequently, the rating for Grindrod Bank Limited was placed ‘Under Criteria Observation’. GCR finalised the review for Grindrod Bank Limited under the released Criteria for Rating Financial Institutions, May 2019. As a result, the rating for Grindrod Bank Limited has been reviewed in line with the new methodology and subsequently removed from ‘Under Criteria Observation’.
The national scale long term issuer rating of Grindrod Bank Limited (‘Grindrod’; ’the bank’) has been upgraded to reflect the bank’s superior cost of risk relative to peers and fairly stable revenue over the years. The bank is also viewed to have adequate capitalisation sound funding and liquidity, further supporting the ratings.
Grindrod is relatively small in size, with a modest market share of approximately 0.2% in South Africa’s oligopolistic banking system. The bank offers a broad range of products and services, although a large amount of its lending is skewed towards property. Positively, revenue stability has been good over the last five years. However, we expect some increasing volatility as the recurring fee and commission earned from the SASSA (‘South Africa Social Security Agency’) has started to diminish.
Capitalisation and earnings are a neutral ratings factor. We expect the GCR capital ratio to range between 14%-15% over the outlook horizon, balancing moderated loan growth (in part due to the weak operating environment) with adequate returns. We forecast the bank to return approximately 1.4% to 1.5% of total assets over the next 12months, balancing a restrained net interest margin of just over 1%, cost to income of approximately 55%, flat non-interest revenues and a low cost of risk.
The risk position is positive ratings factor. This opinion balances the bank’s very strong cost of risk, with loan losses averaging less than 0.3% of total loans over the past four years, and good levels of collateral against high lending concentrations in real estate and some additional complexity in the loan book. Loan loss reserves are considered to be adequate, at around 80% of non-performing loans.
Funding and liquidity are a relative strength of the bank versus market peers. Despite some single name concentrations in the deposit book and higher cost of funds, we consider the funding structure to be stable and benefitting from the lack of concentrations with financial corporates. Furthermore, liquidity is considered to be good, with liquid assets covering a significant 46% of total deposits and multiples of the banks wholesale funding. The regulatory net stable funding and liquidity coverage ratios both compare well to market peers.
Despite being an important and well supported entity within the wider Grindrod Group we have not factored in any support to the ratings on the bank. This largely reflects a conservative view on the capacity of the group to provide timely support, given publicly available information on the group.
The outlook is stable, balancing the weakened operating environment with our opinions on stable capital, liquid and risk.
We could raise the rating if the earnings capacity and capitalisation of the bank improves from beyond current levels. We could also raise the ratings if we have a more defined and favourable view of the creditworthiness of the parent. We consider a lowering of the national scale to be unlikely over the outlook horizon, although a deterioration of asset quality would bring down the ratings.
|Primary analyst||Nyasha Chikwengo||Financial Institutions Analyst|
|Johannesburg, ZA||NyashaC@GCRratings.com||+27 11 784 1771|
|Committee chair||Matthew Pirnie||Sector Head: Financial Institutions 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, June 2019|
|GCR Financial Institutions Sector Risk Scores, July 2019|
Grindrod Bank Limited
|Rating class||Review||Rating scale||Rating class||Outlook/Watch||Date|
|Issuer Long Term||Initial||National||BBB+(ZA)||Stable||April 2016|
|Issuer Short Term||Initial||National||A2(ZA)||–||April 2016|
|Issuer Long Term||Initial||International||BB||Stable||April 2016|
Risk Score Summary
|Country risk score||7.5|
|Sector risk score||8.0|
|Management and governance||0.0|
|Capital and Leverage||0.0|
|Funding structure and Liquidity||0.5|
|Benefits||Financial reimbursement and other services provided to insureds by insurers under the terms of an insurance contract.|
|Capital||The sum of money that is invested to generate proceeds.|
|Financial Institution||An entity that focuses on dealing with financial transactions, such as investments, loans and deposits.|
|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.|
|Loan||A sum of money borrowed by a debtor that is expected to be paid back with interest to the creditor. A debt instrument where immovable property is the collateral for the loan. A mortgage gives the lender a right to take possession of the property if the borrower fails to repay the loan. Registration is a prerequisite for the existence of any mortgage loan. A mortgage can be registered over either a corporeal or incorporeal property, even if it does not belong to the mortgagee. Also called a Mortgage bond.|
|Market||An assessment of the property value, with the value being compared to similar properties in the area.|
|National Scale Rating||National scale ratings measure creditworthiness relative to issuers and issues within one country.|
|Performing Loan||A loan is said to be performing if the borrower is paying the interest on it on a timely basis.|
|Performing||An obligation that performs according to its contractual obligations.|
|Private||An issuance of securities without market participation, however, with a select few investors. Placed on a private basis and not in the open market.|
|Release||An agreement between the creditor and debtor, in terms of which the creditor release the debtor from its obligations.|
|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.|
|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.|
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 Grindrod Bank Limited. The ratings above were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings.
Grindrod Bank 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 information received from Grindrod Bank Limited and other reliable third parties to accord the credit rating included:
- Audited financial results of Grindrod Bank Limited as at 31 December 2018;
- Latest internal and/or external audit report to management;
- A breakdown of facilities available and related counterparties; and
- Industry comparative data.