Rating Action
Johannesburg, 29th July 2020 – GCR Ratings (‘GCR’) has affirmed African Banking Corporation (Moçambique) SA’s national scale long term and short term issuer ratings of BB+(MZ) and B(MZ), respectively. The Outlook has been changed to Negative.
| Rated Entity / Issue | Rating class | Rating scale | Rating | Outlook / Watch |
| African Banking Corporation (Moçambique) S.A | Long Term issuer | National | BB+(MZ) | Negative Outlook |
| Short Term issuer | National | B(MZ) |
Rating Rationale
The national scale rating of African Banking Corporation Moçambique S.A (“BancABC Moçambique”; “the bank”) of BB+(MZ) balances an improving risk position, a relatively concentrated funding base, albeit backed by adequate and improving levels of liquidity, modest competitive position, tight capital and weak earnings. The ratings also benefit from support and integration of the bank with its shareholder, the ABC Holdings Limited. The negative outlook reflects the expected pressure on capital and earnings due to the downturn of the interest rate cycle and COVID 19 induced stress on the operating environment.
BancABC Moçambique’s business profile is constrained by its modest franchise, as reflected by a small market share of both industry loans and deposits being marginally above 2%, higher cost of funds relative to the top 4 banks and revenue volatility that is largely market driven. The mobilisation of low-cost deposits has been slow and cost of funds have historically been higher than the local market average. The bank offers a full suite of banking services grouped into three major business pillars, namely retail banking, commercial banking and global markets and treasury. Traditionally, the bank has been focused on corporate banking, although in recent years it has started shifting its strategy to grow retail business with an agency banking model that will possibly give the bank more geographical reach and better market penetration. However, GCR expects the contribution and sustainability of strategy adjustment to be proven over time to have impact on the rating.
The bank’s capital and earnings is a negative rating factor. GCR Total Capital to Total Risk Weighted Assets reduced to c.17% at December 2019, from c.19% the previous year. The capital depletion was caused by a reported loss of c.MT145m. This has opened the bank to regulatory forbearance risk after falling short of the stipulated minimum capitalisation of MT1.7bn as set by Bank of Mozambique, which became effective in April 2020. To remedy this position, the bank received authority from the shareholder and the regulator to mobilise tier 2 capital from the market. Management reports they are finishing modalities to a tier 2 debt instrument with a local pension fund manager to this effect. GCR is aware of this risk and will continue with surveillance around this, and the entire financial profile. We expect earnings to remain moderate over the next 12 months, balancing the historically high operating costs, the moderation in interest income, impact of COVID-19 and positive contribution expected from the agency banking model deployment and civil service loans initiatives.
Positively, non-performing loans improved from c.23% at December 2018 to c.12% at December 2019. This development has brought the NPL ratio closer to the industry average at December 2019. Credit concentration risk is adequate, with the top 20 loans contributing to c.47.4% of total loans at December 2019 (FY18: 51%). High credit concentration is typical of the Mozambican banking industry which is dominated by few big-ticket corporate clients which exposes the banks to the idiosyncratic risks of these institutions. Positively, loan loss reserves to gross non-performing assets improved to 81.5% at December 2019, from 78.3% at December 2018. The bank’s sectoral loan book distribution is fair in our opinion. Management has observed and expects moderate impact of COVID-19 on the bank’s credit profile given the less stringent implemented lockdowns in Mozambique. However, GCR takes a cautious view of credit on the back of fairly high loan growth, moderate underwriting performance track record and the unquantified effects of the pandemic at the time of review.
The funding and liquidity profile of the bank also slightly moderates the rating. The funding structure of the bank is weaker compared to the top 4 peers. Historically, the bank’s funding structure has been characterised by costlier term deposits, as indicated by the cost of funds rationale given above. Positively, GCR notes a continued trend of improvement to the cost of funding which aligns it to the market average. Deposit concentration is adequate, with the top 20 depositors accounting for c.48% of total deposits. However, the top 3 depositors are higher than most regional rated peers. The bank’s local currency liquidity position was just adequate over the review period, with the COVID-19 lockdown easing liquidity demand further. GCR liquid assets to customer deposits were c.21% at 31 December 2019 compared to c.32% in 2018. Foreign currency liquidity remains constrained over the review period owing in part to the c.30% reserve requirement instituted on foreign currency deposits by the regulator.
The ratings benefit from support and integration of the bank with its ultimate parent, the ABCH Holdings Limited. BancABC Moçambique is a wholly owned subsidiary of ABC Holdings Limited, whose ultimate parent is Atlas Mara Limited listed in the UK.
Outlook Statement
The bank’s outlook is negative, reflective of GCR’s expectation that the bank will continue to suffer earnings pressure in the short term due to the COVID-19 pandemic, prevailing downwards pressure on interest rates and other idiosyncratic characteristics. We also expect continued stress on the foreign currency liquidity and mild volatility in loan book performances.
Rating Triggers
Upward rating movement is unlikely given the negative outlook. However, the outlook may be revised to Stable, should earnings and capitalisation improve. The bank’s rating could be lowered on further weakening in the funding structure, continued breach of regulatory capital minimums, enduring negative returns and/or a retrogressing risk profile.
Analytical Contacts
| Primary analyst | Kudzanai Samanga | Financial Institutions Analyst |
| Johannesburg, ZA | kudzanais@GCRratings.com | +27 11 784 1771 |
| Committee chair | Matthew Pirnie | Group Head of Ratings |
| Johannesburg, ZA | matthewp@GCRratings.com | +27 11 784 1771 |
Related Criteria and Research
| Criteria for the GCR Ratings Framework, May 2019 |
| Criteria for Rating Financial Institutions, May 2019 |
| GCR Ratings Scale, Symbols & Definitions, May 2019 |
| GCR Country Risk Scores, May 2020 |
| GCR Financial Institutions Sector Risk Score, July 2020 |
Ratings History
BancABC Moçambique
| Rating class | Review | Rating scale | Rating class | Outlook/Watch | Date |
| Long Term issuer | Initial | National | BBB-(MZ) | Stable | December 2004 |
| Last | National | BB+(MZ) | Stable | July 2019 | |
| Short Term issuer | Initial | National | A3(MZ) | n/a | December 2004 |
| Last | National | B (MZ) | n/a | July 2019 |
RISK SCORE SUMMARY
| Rating Components & Factors | Risk score |
| Operating environment | 3.00 |
| Country risk score | 1.00 |
| Sector risk score | 2.00 |
| Business profile | (1.50) |
| Competitive position | (1.50) |
| Management and governance | 0.00 |
| Financial profile | (2.50) |
| Capital and Leverage | (0.75) |
| Risk | (0.75) |
| Funding structure and Liquidity | (1.00) |
| Comparative profile | 3.00 |
| Group support | 3.00 |
| Government support | 0.00 |
| Peer analysis | 0.00 |
| Total Score | 2.00 |
Glossary
| Benefits | Financial reimbursement and other services provided to insureds by insurers under the terms of an insurance contract. |
| Capital | The sum of money that is invested to generate proceeds. |
| Financial Institution | An entity that focuses on dealing with financial transactions, such as investments, loans and deposits. |
| 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. |
| Loan | A sum of money borrowed by a debtor that is expected to be paid back with interest to the creditor. A debt instrument where immovable property is the collateral for the loan. A mortgage gives the lender a right to take possession of the property if the borrower fails to repay the loan. Registration is a prerequisite for the existence of any mortgage loan. A mortgage can be registered over either a corporeal or incorporeal property, even if it does not belong to the mortgagee. Also called a Mortgage bond. |
| Market | An assessment of the property value, with the value being compared to similar properties in the area. |
| National Scale Rating | National scale ratings measure creditworthiness relative to issuers and issues within one country. |
| Performing Loan | A loan is said to be performing if the borrower is paying the interest on it on a timely basis. |
| Performing | An obligation that performs according to its contractual obligations. |
| Private | An issuance of securities without market participation, however, with a select few investors. Placed on a private basis and not in the open market. |
| Release | An agreement between the creditor and debtor, in terms of which the creditor release the debtor from its obligations. |
| Risk Management | Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy. |
| Risk | The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives. |
| Short Term | Current; ordinarily less than one year. |
SALIENT POINTS 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.
The credit ratings have been disclosed to BancABC Moçambique. The ratings above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings.
BancABC Moçambique participated in the rating process via written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information received from BancABC Moçambique and other reliable third parties to accord the credit rating included:
- Audited financial results of BancABC Moçambique as at 31 December 2019;
- A breakdown of facilities available and related counterparties; and
- Internal and external audit reports as at January 2020;
- Industry comparative data.
