Johannesburg, 20 October 2016 — Global Credit Ratings has upgraded Investec Bank Limited’s long-term national scale rating to AA(ZA) and affirmed its short-term national scale rating at A1+(ZA); with the outlook accorded as Stable. Furthermore, Global Credit Ratings has affirmed the international scale local currency rating of BBB- accorded to Investec Bank Limited; with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Investec Bank Limited (“IBL” and/or “the bank”) based on the following key criteria:
The ratings of IBL reflect its sustainable business model, client-focussed strategy, and significant share in selected, resilient market segments. Solid performance metrics, driven by a diversified and predominantly recurring earnings base, have accompanied comfortable capitalisation/liquidity and improved funding structure and stability (to full Basel III implementation levels). However, South Africa’s challenging operating environment creates asset quality uncertainty, despite IBL’s select clientele and collateralised loan book.
At FYE16, IBL contributed around 26% and 49% of Investec Group (“Investec”, “the group”) total operating income (“TOI”) of GBP1.8bn and assets of GBP39.5bn respectively. IBL is the fifth largest South African bank, accounting for 8% of banking industry assets at 30 June 2016, and is considered to be systemically important, together with South Africa’s four largest banks (which together command 82% of South African bank assets).
Loan growth of 21.2%, funded primarily by a 26.4% increase in retail deposits (in line with stable funding attraction strategies), has driven revenue growth and supported funding-based regulatory compliance metrics at full Basel III implementation levels. Enhanced funding diversification through client, capital and money market penetration is noted. Liquidity and balance sheet risks are tightly managed.
IBL is comfortably capitalised. The risk-weighted capital adequacy ratios (“CAR”) moderated slightly at FYE16 to 11.0% (Tier 1) and 14.6% (total) vs. 11.4% and 15.4% at FYE15, respectively. Risk-asset growth combined with hybrid capital phase-out provisions under Basel III drove the decline in CARs, which remained well above regulatory minima and within management targets (despite being calculated on the more conservative ‘standardised’ approach).
IBL’s strong credit practices and lending linked to client cash flow and collateral reduced the gross default ratio to 1.5% at FYE16 (FYE15: 2.1%). Core impaired loans declined to R3.2bn (FYE15: R3.7bn) due to settlements, write-offs, and lower non-performing loans in new origination. While provision coverage of defaults declined to 28.6% (FYE15: 30.6%), provisions plus collateral fully cover arrears. While most metrics highlighted asset quality improvement, operating environment challenges make a reversal of this trend in F17 likely.
F16 pre-tax earnings rose 16.9% (F15: 49.0%), supported by loan and funded income growth and solid transactional flows, moderated by higher impairment and operating costs. ROaA and ROaE moderated slightly to 0.9% (F15: 1.0%) and 11.4% (F15: 11.5%).
The ratings fully incorporate the bank’s systemically important status, meaningful market positions in key activities, conservative financial profile, solid regulatory compliance metrics, and through-the-cycle resilience. Consequently, there is limited upside rating potential. Significant deterioration in asset or earnings quality, profitability, funding and liquidity profile, and/or capitalisation, could prompt negative rating action.
|NATIONAL SCALE RATINGS HISTORY||INTERNATIONAL SCALE RATING HISTORY|
|Initial rating (December 2000)||Initial rating (October 2013)|
|Long-term: AA-(ZA); Short-term: A1+(ZA)||Long-term: BBB|
|Outlook: Stable||Outlook: Stable|
|Last rating (December 2015)||Last rating (December 2015)|
|Long-term: AA-(ZA); Short-term: A1+(ZA)||Long-term: BBB-|
|Outlook: Stable||Outlook: Stable|
|Primary Analyst||Committee Chairperson|
|Omega Collocott||Jennifer Mwerenga|
|Sector Head: Financial Institution Ratings||Senior Credit Analyst|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2016
South Africa Bank Bulletin (2016)
South Africa Bank Statistical Bulletin (August 2016)
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; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
Investec Bank 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 ratings have been disclosed to Investec Bank Limited with no contestation of the rating.
The information received from Investec Bank Limited and other reliable third parties to accord the credit rating(s) included:
- Audited financial results of the bank at 31 March 2016 (plus four years of comparative numbers);
- Corporate governance and enterprise risk framework;
- Reserving methodologies and capital management policy;
- Industry comparative data and regulatory framework; and
- A breakdown of facilities available and related counterparties.
The ratings above were solicited by, or on behalf of, Investec Bank Limited, and 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 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.|
|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.|
|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.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|Collateral||Asset provided to a creditor as security for a loan.|
|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.|
|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.|
|Diversification||Spreading risk by constructing a portfolio that contains different investments, 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.|
|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.|
|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.|
|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, and 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.|
|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.|
|Settlement||Full repayment of an obligation.|
|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 Investec Bank Limited’s rating to AA(ZA); Outlook Stable.