Johannesburg, 28 Sep 2015 — Global Credit Ratings has upgraded the national scale long term rating assigned to ZB Bank Limited to BB-(ZW) and affirmed the national scale short term rating of B(ZW); with the outlook accorded as Stable. The rating(s) are valid until September 2016.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating(s) to ZB Bank Limited (“ZBBL”, and/or “the bank”) based on the following key criteria:
The upgrade of ZBBL’s long-term national scale rating reflects GCR’s expectation that the Government of Zimbabwe (which has a 23.5% stake in the bank) is likely to provide support for the bank under extreme circumstances, as evidenced by the recent USD20m capital injection. The ratings also factor in improvements in the bank’s financial profile relative to its position in February 2015, moderated by weak asset quality and solvency indicators (in particular, the high level of delinquent loans relative to capital).
The bank is the flagship of ZB Financial Holdings Limited (“ZBFHL”, the “group”), which is in the process of consolidating its building society arm, ZB Building Society into the bank. However, the ratings do not reflect the effects of the merger (which would be expected to improve the bank’s credit profile), as it has been subject to multiple delays and is yet to obtain regulatory approval.
Total regulatory capital fell by 73.3% to USD9m YoY at FYE14 (with the bank’s capital adequacy ratio dropping below the regulatory minimum of 12% to 3.3%), following a Reserve Bank of Zimbabwe (“RBZ”) onsite review, in which the RBZ advised the bank that selected collateral forms, which the bank had recognised as security on loans and advances, would not be taken into account in calculating core capital for regulatory purposes. This was compounded by a loss of USD6.8m in F14. However, a USD20m capital injection from shareholders supported by a return to profitability (with all earnings retained), as well as a reduction in risk weighted assets, increased the bank’s capital base and capital adequacy ratio to USD35m and 13.7% respectively at 1H F15.
A contraction in loan book growth given the retarded credit growth in the sector, combined with NPL accretion (mainly high value corporate exposures) against a backdrop of an economic slowdown, resulted in the bank’s gross NPL ratio peaking at 34.1% at 1H F15 (FYE14: 31.3% and FYE13: 17.3%). Given the reality of long time delays (cumbersome legal processes), and the costs and haircuts involved with converting collateral into cash, GCR places little weight on security coverage and more emphasis on specific provisioning. That said, while ZBBL holds collateral against most of its NPLs, with a coverage ratio (excluding collateral) of 6.9% at 1H F15 (FYE14: 2.7% and FYE13: 10.6%), the bank’s provisioning level is considered low relative to its peers.
Despite posting a 6.2% increase in operating income to USD48m in F14 (following negative growth of 8.7% in F13), the bank’s bottom line diminished further in F14, recording a net loss of USD6.8m. This was attributable to a steep rise in impairment costs and a substantial increase in operating expenditure (mainly due to nonrecurring staff retrenchment costs). However, in 1H F15, the bank returned to profitability, registering a net profit of USD1.4m, supported by a lower cost base and lower credit costs.
An area of concern is the bank’s maturity mismatches in its asset/liability profile (a structural industry feature) and high dependence on wholesale funding (rendering the bank susceptible to external shocks). Nonetheless, ZBBL’s liquidity position is sound and is currently at an atypically high level for the bank, given the adoption of a cautious approach towards lending, as evidenced by the 44.0% liquidity ratio at 1H F15, which stood well above the 30% statutory minimum.
An upward movement in the bank’s ratings could arise from substantial and sustainable improvements in asset quality, solvency and profitability. Further deterioration in the bank’s credit profile, profitability and solvency indicators could negatively impact its ratings.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (August 2007)|
|Long term: A(ZW); Short term: A1-(ZW)|
|Outlook: Rating Watch|
|Last rating (February 2015)|
|Long term: B+(ZW); Short term: B(ZW)|
|Outlook: Rating Watch|
|Primary Analyst||Committee Chairperson|
|Kuzivakwashe Murigo||Jennifer Mwerenga|
|Credit Analyst||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 2015
Zimbabwean Bank Statistical Bulletin (June 2015)
ZBBL rating reports (2007-14)
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.
ZB 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 rating/s has been disclosed to ZB Bank Limited with no contestation of the rating/s.
Information received from ZB Bank Limited and other reliable third parties to accord the credit rating(s) included:
- Audited financial results as at 31 December 2014 (and three years of comparative numbers)
- Unaudited interim results at 30 June 2015
- Budgeted financial statements for 2015
- Latest internal and/or external audit report to management
- A breakdown of facilities available and related counterparties
- Corporate governance and enterprise risk framework
- Industry comparative data
The ratings above were solicited by, or on behalf of ZB 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||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 (i.e. being paid back in accordance with their terms) and the likelihood that they will continue to perform.|
|Audit Report||An audit report is 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.|
|Building Society||A type of deposit-taking financial institution that engages in long-term mortgage lending, primarily to finance owner-occupied residential mortgages/property.|
|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.|
|Capital Base||The issued capital of a company, plus reserves and retained profits.|
|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||Corporate governance broadly 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||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.|
|Credit Rating Agency||An entity that provides credit rating services.|
|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.|
|Creditworthiness||An assessment of a debtor’s ability to meet debt obligations.|
|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.|
|Exchange||A standardised marketplace in which different assets are traded.|
|Exposure||Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For a company, its exposure may relate to a particular product class or customer grouping. Exposure may also arise from an overreliance on one source of funding.|
|Financial Institution||An entity that focuses on dealing with financial transactions, such as investments, loans and deposits.|
|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.|
|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||A 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||The national scale 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.|
|NPL Ratio||The ratio of non-performing loans and advances to total gross loans and advances, expressed as a percentage.|
|Operating Profit||Profits from a company’s ordinary revenue-producing activities, calculated before taxes and interest costs.|
|Performing Loan||A loan is said to be performing if the borrower is paying the interest on it on a timely basis.|
|Principal||The total amount borrowed or lent, e.g. the face value of a bond, excluding interest.|
|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.|
|Regulatory Capital||The total of primary, secondary and tertiary capital.|
|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.|
|Shareholder||An individual, entity or financial institution that holds shares or stock in an organisation or company.|
|Short Term||Current; ordinarily less than one year.|
|Short Term Rating||A short term rating is an opinion of an issuer’s ability to meet all financial obligations over the upcoming 12 month period, including interest payments and debt redemptions.|