Johannesburg, 31 October 2017 — Global Credit Ratings (“GCR”) has upgraded the long-term national scale rating of Steward Bank Limited to BBB(ZW) and affirmed Steward Bank Limited’s short-term national scale rating of A3(ZW); with the outlook accorded as Stable. The ratings are valid until October 2018.
SUMMARY RATINGS RATIONALE
The ratings of Steward Bank Limited (“Steward Bank” or “the bank”) reflect sustained improvements in liquidity, asset quality, and profitability over the period FY14 to FY17. The ratings also reflect the bank’s strong capitalisation, but are constrained by the bank’s insignificant market position in terms of balance sheet size, although congnisance is taken of the bank’s strategy to focus on a transactional banking model, and a challenging operating environment characterised by foreign currency shortages and heightened default risk, which could exert downward pressure on asset quality. Furthermore, the ratings are underpinned by strong implied financial support available from its parent, Econet Wireless Zimbabwe Limited, Zimbabwe’s largest provider of telecommunication services, listed on the Zimbabwean Stock Exchange.
After write-offs of USD4.1m, the bank’s gross non-performing loans (“NPLs”) decreased further by 37.9% (FY16: 69.7%) to USD6m at FY17. This resulted in the bank’s gross NPL ratio declining to 10.3% at FY17 from 15.6% at FY16. Consequently, specific provision coverage of NPLs increased to 52.3% (FY16: 23.6%). Special mention (or past due but not impaired) loans accounted for a higher 30.2% (FY16: 8.7%) of total loans at FY16, with the manufacturing sector being the primary contributor (52.5%). The bank’s asset quality remains vulnerable given the challenging operating environment facing corporates and consumers.
Capitalisation improved in FY17 with Tier 1 capital growing by 20.9% supported by a 17% growth in retained earnings. Combined with a decline in risk weighted assets (6.7%), the bank’s risk weighted capital adequacy ratio and Tier 1 ratio increased to 45.5% and 40.1% at FY17 from 36.8% and 30.9% at FY16 respectively, remaining well above the regulatory minima. After posting its first profit in FY16 after over three years of consecutive losses, the bank’s internal capital generation ratio was 7.9% at FY16, increasing further to 8.2% at FY17. However, total capital/total assets registered a lower 33.2% at FY17 (FY16: 40.8%).
Total liability funding grew by 50.6% to USD144.9m at FY17 despite a decline in credit lines (FY16: USD96.2m), mainly due to growth in customer deposits (56.1%) supported by a combination of new and existing customer accounts. The net advances to customer deposits ratio decreased from 62.5% to 37% at FY17 as the rapid growth in customer deposits could not be matched by loan creation given the increasingly tough operating environment, which was characterised by increased default risk. Management maintained an ample liquid asset base supported by a liquidity ratio well above the statutory minimum of 30%.
After posting losses from FY13 to FY15, net profit before tax grew by 35.6% to a five year high of USD8.4m in FY17, supported by an increase in non-interest income. This was despite increases in operating and loan impairment costs. The bank’s ROaA and ROaE registered 3.1% and 8.6% in FY17 (FY16: 3.2% and 8.2%) respectively.
Upward movement triggers would be contingent on sustained positive trend in profitability and asset quality, as well as growth in market position and improvements in operating system efficiencies. The ratings could come under pressure if there is a weakening in profitability, asset quality, capitalisation and/or operating conditions, and any diminution/ withdrawal of parental support.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (September 2005)||Last rating (September 2016)|
|Long-term: BB-(ZW); Short term: B(ZW)||Long term: BBB-(ZW); Short term: A3(ZW)|
|Outlook: Rating Watch||Outlook: Stable|
|Senior Credit Analyst|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions (March 2017)
Steward Bank rating reports (2005-16)
Zimbabwe Bank Statistical Bulletin (June 2017)
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; and c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
Steward 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 credit ratings have been disclosed to Steward Bank Limited with no contestation of the rating.
Information received from Steward Bank Limited and other reliable third parties to accord the credit ratings included:
- Audited financial results as at 28 February 2017 (and four years of comparative numbers)
- Unaudited interim results at 31 August 2017
- 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
The ratings above were solicited by, or on behalf of, Steward 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
|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).|
|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.|
|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.|
|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.|
|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.|
|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.|
|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.|
|Net Profit||Trading/operating profits after deducting the expenses detailed in the profit and loss account (including taxes).|
|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 Watch||Indicates that a rating is under review for possible change in the short term and the movement may be either positive or negative.|
|Retained Earnings||Earnings not paid out as dividends by a company. Retained earnings are typically reinvested back into the business and are an important component of shareholders’ equity.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|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.|
|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.|
|Stock Exchange||A market with a trading-floor or a screen-based system where members buy and sell securities.|
|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.|
For a glossary of terms please click here
GCR upgrades Steward Bank Limited’s rating to BBB(ZW); Outlook Stable.