Johannesburg, 10 October 2018 — Global Credit Ratings has upgraded the national scale rating assigned to ZB Bank Limited to BB(ZW) in the long-term and affirmed B(ZW) in the short-term; with the outlook accorded as Stable. The ratings are valid until September 2019.
SUMMARY RATING RATIONALE
The ratings of ZB Bank Limited’s (“ZBBL”, “the bank”) have been upgraded based on adequate capitalisation, stable funding, improving asset quality and strong liquidity. The ratings also reflect the group’s corporate governance issues, track record of poor asset quality and modest market share.
The stable outlook reflects our assumption, that the bank’s capitalisation will remain satisfactory, with a Tier 1 capital adequacy ratio in the range of between 23% and 25%, supported by growth in earnings, with the net profit after tax expected to increase by c33% in the next 12 months, as the bank increases its fee-based income although lack of lending is a concern. The bank’s stable funding structure and liquidity also support the stable outlook. The bank is the most significant subsidiary of ZB Financial Holdings Limited (“ZBFHL”, “the group”), contributing 84% of the group’s assets. The ratings accorded do not reflect the effects of the merger.
The bank is adequately capitalised with the Tier 1 capital ratio improving to 26% at FY17 from 24.2% at FY16, supported by growth in retained earnings. The bank intends to meet the 2020 USD100m capital threshold through a combination of earnings growth and merger with the building society.
The bank’s profitability improved, registering a 31% increase in net income to USD11.5m in FY17 from USD7.9m in FY16. This was largely attributable to an 18.9% growth in non-interest income, with fees and commission income growing by 10% while trading income increased by 70.8%. Consequently, ZBBL’s ROaE and ROaA increased to 19.5% (FY16: 15.0%) and 2.9% (FY16: 2.3%) in FY17 respectively, and expectations for FY18 are c27% and 3.9% respectively.
The bank’s cost of funding was slightly higher than some of its peers at 3.7% at FY17 but declined to 1.6% at 1H FY18. The bank is mainly funded by customer deposits constituting 96.3% of total liability funding in FY17 from 87.4% in FY16.
The bank’s liquidity position remains stable, with a liquidity ratio of 81% as at 30 June 2018, which was well above the statutory minimum of 30%. To manage liquidity risk, the bank maintains high levels of liquid assets, with a liquid asset to short term funding ratio of 73.9% at FY17 (FY16: 41.7%). Cash and cash equivalents as a percentage of short-term deposits was 28.9% at FY17. The foreign currency shortages cause challenges in sufficiently meeting customers’ international payment obligations.
The gross NPL ratio decreased to 10.9% at FY17 (FY16: 23.2%), and further improved to 10.3% at 1H FY18, due to recoveries and write-offs of legacy loans, but remains well above the industry average. Loan loss provisioning was low with provisions against NPLs of 41.4% at FY17 (FY16: 15.6%) but implementation of IFRS 9 resulted in increased loan loss provisions of 72.2% at 1H FY18. Asset quality is expected to further improve in the next 12 months.
The ratings could be positively affected by improvements in asset quality, sustained earnings growth, resolution of corporate governance and shareholder issues and growth in market share. The ratings could be negatively affected by an inability to meet the minimum capital requirements, reversal in asset quality trend.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (August 2007)||Last rating (September 2017)|
|Long-term: A(ZW); Short-term: A1-(ZW)||Long-term: BB-(ZW) ; Short-term: B(ZW)|
|Rating Watch: Yes||Outlook: Positive|
|Primary Analyst||Committee Chairperson|
|Vimbai Muhwati||Matthew Pirnie|
|Credit Analyst||Sector Head: Financial Institutions|
|(011) 784-1771||(011) 784-1771|
junior Credit Analyst
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2017
ZBBL rating reports (2007-17)
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.
ZB 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 ZB Bank Limited.
Information received from ZB Bank Limited and other reliable third parties to accord the credit ratings included:
- Audited financial results as at 31 December 2017 (and three years of 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
- 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 SECTOR 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).|
|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.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|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 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.|
|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.|
|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.|
|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.|
|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.|
|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.|
|Short-Term||Current; ordinarily less than one year.|
For a detailed glossary of terms please click here
GCR upgrades ZB Bank Limited’s rating to BB(ZW); Outlook Stable.