Johannesburg, 31 August 2018 — Global Credit Ratings (“GCR”) has upgraded NMB Bank Limited’s long-term and short-term national scale ratings to BBB-(ZW) and A3(ZW) respectively; with the outlook accorded as Stable. The ratings are valid until August 2019.
SUMMARY RATINGS RATIONALE
The ratings of NMB Bank Limited (“NMB”, “the bank”) have been upgraded based on improving asset quality and profitability while maintaining adequate capitalisation in prevailing uncertain macroeconomic environment. The ratings also reflect the bank’s stable funding structure and strong liquidity.
The stable outlook reflects our assumptions that the bank’s financial performance will continue to remain strong in line with the general performance of banks in the market. We expect the non-performing loan (“NPL”) ratio to decline to below 5% at FY18 from 8% at FY17 as a result of more stringent credit underwriting standards and monitoring, as well as aggressive loan collection processes. Capitalisation of the bank is expected to remain at adequate levels with the capital adequacy ratio ranging between 23% and 25% in the next 12 months, supported by strong earnings, with the profit after tax expected to grow by at least 50% at FY18.
The bank’s capitalisation is considered adequate to the risks of the operating environment, with a Tier 1 capital adequacy ratio of 21.3% at FY17 (FY16: 20.6%) and total capital adequacy ratio of 24.3% (FY16: 23.3%) which is above the statutory minima of 8% and 12%, respectively. The bank’s core capital grew by 13.5% supported by a 42.2% growth in retained earnings. The bank’s earnings significantly grew in FY17, to an after-tax profit of USD9.9m (FY16: USD5.1m) driven by a 24.1% increase in fee and commission, a 113% increase in trading income, and a 52.2% decrease in impairment charge, despite a 5.3% decrease in interest income. The cost ratio declined to 62.0% (FY16: 64.7%). The bank’s net profit after tax is expected to grow to around USD16m over the next 12 months, driven by fees and commission income as the bank grows its retail client base and expands its mobile banking and e-banking services, increasing transactions. Nominal costs are expected to remain at the current level, resulting in an improved cost ratio of 60% at FY18 with a medium to long term target of 45%.
The bank’s risk position compares adequately to its peers. The bank cautiously grew its loan book by 4.3% in FY17 due to relatively high credit risk in the market. The bank’s asset quality improved, with its gross NPLs decreasing by 23.5% to USD16.8m in FY17 due to more stringent lending processes resulting in a gross NPL ratio of 8.0% (FY16: 10.7%). Loan concentrations are low, with the highest and top 20 loans constituting 4.2% and 31.8% of total advances respectively.
The bank’s operations are mainly funded through customer deposits which is in line with its peers in the market. The bank seeks to reduce its cost of funding and reliance on credit lines, which exposes the bank to increased liquidity risk, emanating from foreign currency shortages by growing its depositor funding through expanding its client base in the retail sector. The highest and top 20 depositors constituted 9% and 52% as at FY17. The bank’s liquidity position remains stable with a liquidity ratio of 46.1%, which was well above the statutory minimum of 30% at FY17.
The bank has a fairly strong brand in the domestic market, as well as financial and technical shareholder support available from reputable development finance institutions, which maintain shareholdings through NMBZ Holdings Limited.
NMB’s ratings could benefit from a sustained improvement in asset quality, an improvement in competitive positioning and sustained performance in terms of capitalisation, earnings and liquidity. The bank’s ratings could be negatively impacted by deterioration in asset quality, capital generation and a further deterioration in the operating environment.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (December 2005)||Last rating (August 2017)|
|Long-term: BBB-(ZW); Short-term: A3(ZW)||Long-term: BB+(ZW); Short-term: B(ZW)|
|Outlook: Stable||Outlook: Stable|
Junior Credit Analyst
|Sector Head: Financial Institution Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions (March 2017)
NMB 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 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.
NMB Bank Limited participated in the rating process via face-to-face management meetings, telephone conversations 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 NMB Bank Limited.
Information received from NMB Bank Limited and other reliable third parties to accord the credit ratings included:
• Audited financial results as at 31 December 2017 (and four years comparative numbers)
• Unaudited interim results at 30 June 2018
• Budgeted financial statements for 2018
• Latest internal and/or external audit report to management
• A breakdown of facilities available and related counterparties
The ratings above were solicited by, or on behalf of, NMB Bank 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 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.|
|Bond||A long term debt instrument issued by either: a company, institution or the government to raise funds.|
|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.|
|Cost Ratio||The ratio of operating expenses to operating income. Used to measures a bank’s efficiency.|
|Credit Risk||The possibility that a bond issuer or any other borrowers (including debtors/creditors) will default and fail to pay the principal and/or interest when due.|
|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.|
|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.|
|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.|
|Liquid Assets||Assets, generally of a short term, that can be converted into cash.|
|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.|
|Margin||The rate taken by the lender over the cost of funds, which effectively represents the entity’s profit and remuneration for taking the risk of the loan; also known as spread.|
|Market Capitalisation||The total value of a company’s shares as quoted on a stock exchange. It is calculated by multiplying the total number of shares in issue by the market price.|
|Maturity||The length of time between the issue of a bond or other security and the date on which it becomes payable in full.|
|Net Interest Margin||Net interest income divided by average interest earning assets. Measures a bank’s margin after paying funding sources and how successful a bank’s interest-related operations are.|
|Past Due||Any note or other time instrument of indebtedness that has not been paid on the due date.|
|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.|
|Rating Outlook||Indicates the potential direction of a rated entity’s rating over the medium term, typically one to two years. An outlook may be defined as: ‘Stable’ (nothing to suggest that the rating will change), ‘Positive’ (the rating symbol may be raised), ‘Negative’ (the rating symbol may be lowered) or ‘Evolving’ (the rating symbol may be raised or lowered).|
|Regulatory Capital||The total of primary, secondary and tertiary capital.|
|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.|
|Tier 1 Capital||Primary capital consists of issued ordinary share capital, hybrid debt capital, perpetual preference share capital, retained earnings and reserves. This amount is then reduced by the portion of capital that is allocated to trading activities and other regulatory deductions.|
|Treasury Bill||Short-term obligation backed by the government that bears no interest and is sold at a discount.|
For a glossary of terms please click here
GCR upgrades NMB Bank Limited’s rating to BBB-(ZW); Outlook Stable.