Announcements

Global Credit Ratings has affirmed African Banking Corporation Zambia Limited’s rating of BBB-(ZM)

Johannesburg, 30 June 2016 – Global Credit Ratings has today affirmed the national scale ratings assigned to African Banking Corporation Zambia Limited of BBB-(ZM) and A3(ZM) in the long term and short term respectively; with the outlook accorded as Evolving.

Concurrently, the above ratings have been withdrawn at the request of the client. Therefore, GCR will no longer monitor the performance of African Banking Corporation Zambia Limited. The client is in the process of concluding the acquisition of Finance Bank of Zambia Plc (“FBZ”) and anticipates that the future credit profile will be different from the current standalone profile.

SUMMARY RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit ratings to African Banking Corporation Zambia Limited (“BancABC Zambia”, “the bank”), based on the following key criteria:

The ratings accorded to African Banking Corporation Zambia Limited (“BancABC Zambia”, “the bank”) reflect its growing franchise value and proven support structure, with financial and operational support, and strategic direction provided by the new owners and ultimate parent company, Atlas Mara Limited (“Atlas Mara”, “the group”). The ‘Evolving’ outlook takes into account the asset quality challenges and the potential rating impact of the impending acquisition of FBZ and its implications on the bank’s financial profile. The outlook may be defined as being ‘Evolving’ (the rating symbol may be raised or lowered) where the fundamental trend has conflicting elements of both positive and negative.

During F14, the bank’s parent, ABC Holding Limited (“ABCH”), was acquired (98.7% equity stake) by Atlas Mara, with the full takeover completed in F15. The new shareholders are driving the group’s next growth phase and stronger inroads into the retail sector. Atlas Mara, through BancABC Zambia, is in the process of acquiring a 100% shareholding in FBZ, as announced in October 2015. The acquisition (c.USD73m transaction) is expected to conclude by end 2Q 2016. FBZ is the 6th largest bank in Zambia in terms of assets. The acquisition is in line with Atlas Mara’s strategic goals ie, to achieve a top five position in the markets in which the group operates, through both organic and acquisition-led growth.

BancABC Zambia’s total regulatory capital amounted to ZMK495.2m at FYE15, which was slightly below the prudential minimum of ZMK520m. Consequently, in February 2016, shareholders approved the conversion of USD37m (c.ZMK406m) subordinated debt (Tier 2 capital) into equity. The move will boost Tier 1 capital and the overall qualifying capital for regulatory purposes. Capital was adequate on a risk weighted basis, with the bank reporting a capital adequacy ratio of 38.7% at FYE15 (FYE14: 40.0%), which was well above the prudential minimum of 10%.

Asset quality deteriorated further in F15, mainly due to the downgrade of a single large exposure to a corporate borrower (41.9% of total impaired loans). Consequently, gross non-performing loans (“NPLs”) amounted to 22.4% of gross loans at FYE15, up from 13.8% at FYE14. NPLs net of specific provisions amounted to 34.9% of capital at FYE15 (FYE14: 18.0%). The growth in core capital (through the debt/equity conversion) is expected to enhance loss absorption buffers. During 2015, Atlas Mara conducted a comprehensive review of the credit lifecycle management process at its banking subsidiaries, following which the group has now embarked on a credit transformation programme (“CTP”) to enhance the credit process, with full implementation expected in 2016. The CTP also introduces better credit scoring and collections capability.

Pre-tax profit grew by 166.5% in F15 (F14: 67.7% decrease), driven by loan growth, higher net interest margin, growth in non-interest income and a decline in credit losses (following an aggressive loan clean-up in F14). Liquid assets (excluding mandatory statutory reserves balances with the central bank) amounted to 66.0% of short-term funding at FYE15 (FYE14: 63.7%).

NATIONAL SCALE RATINGS HISTORY    
     
Initial ratings (October 2005)    
Long term: BBB-(ZM); Short term: A3(ZM)    
Outlook: Negative    
     
Last ratings (June 2015)    
Long term: BBB-(ZM); Short term: A3(ZM)    
Outlook: Stable    
     

ANALYTICAL CONTACTS

Primary Analyst    
Jennifer Mwerenga    
Senior Credit Analyst    
(011) 784-1771    
jennifer@globalratings.net    
     
Committee Chairperson    
Omega Collocott    
Sector Head: Financial Institution Ratings    
(011) 784-1771    
omegac@globalratings.net    

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Global Master Criteria for Rating Banks and Other Financial Institutions, updated March 2016

Zambia Bank Statistical Bulletin (November 2015)

BancABC Zambia rating reports (2005-15)

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.

African Banking Corporation Zambia 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 has been disclosed to African Banking Corporation Zambia Limited with no contestation of the ratings.

The information received from African Banking Corporation Zambia Limited and other reliable third parties to accord the credit rating included:

  • Audited financial results of the bank at 31 December 2015 (plus four years of comparative numbers);
  • Unaudited management accounts of the bank as at 31 March 2016;
  • Budgeted financial statements for 2016;
  • 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, African Banking Corporation Zambia 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.
Capital The sum of money that is invested to generate proceeds.
Capital Base The issued capital of a company, plus reserves and retained profits.
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.
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.
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.
Equity Equity (or shareholders’ funds) is the holding or stake that shareholders have in a company. Equity capital is raised by the issue of new shares or by retaining profit.
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.
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.
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.
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.
Securities Various instruments used in the capital market to raise funds.
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 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.

For a detailed glossary of terms utilised in this announcement please click here

Global Credit Ratings has affirmed African Banking Corporation Zambia Limited’s rating of BBB-(ZM); Ratings Withdrawn

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