GCR affirms Grindrod Bank Limited’s rating of BBB+(ZA); Outlook Stable.
Johannesburg, 13 April 2017 - Global Credit Ratings has affirmed the national scale ratings assigned to Grindrod Bank Limited of BBB+(ZA) and A2(ZA) in the long term and short term respectively; with the outlook accorded as Stable. Furthermore, Global Credit Ratings has affirmed the international scale long-term local currency rating assigned to Grindrod Bank Limited of BB; with the outlook accorded as Negative.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating(s) to Grindrod Bank Limited’s (“Grindrod Bank” or “the bank”) based on the following key criteria:
Grindrod Bank’s ratings reflect its established and streamlined business model (offering niche banking products and services to private, corporate and institutional clients in South Africa), its sound standalone financial profile, and demonstrated financial support from its parent (Grindrod Limited). The bank’s risk appropriate capitalisation and conservative risk appetite, mitigate to an extent its structural reliance on confidence sensitive wholesale funding. These strengths are, however, partially offset by an increasingly challenging economic climate and consequent weakening credit environment.
The bank is a subsidiary (96.6%) of Grindrod Limited (“the group”), an established freight, shipping and financial services group with operations in South Africa, Africa and Asia. The group had a consolidated capital base of R15.8bn and assets of R39.1bn at FY16. Furthermore, implicit linkages with the parent, such as shared corporate identity, common management (ie, board membership) and intercompany loans/deposits (albeit small at 0.9% of total loans and 3.5% of total deposits at FY16), as well as backing through guarantees on debt issues, were also favourably considered. The bank contributed 38.8% of the group’s consolidated assets at FY16 (FY15: 27.7%).
The bank’s regulatory capital and reserves grew by 21.8% (FY15: 21.3%) to R1.0bn at FY16, supported by retained earnings (R153.6m) and growth in preference share capital (R50m). The total risk weighted capital adequacy ratio (“CAR”) increased slightly to 13.7% at FY16 (FY15: 13.5%). The CAR was well above the statutory minimum of 10.25%, calculated in line with Basel III capital requirements, as currently applicable in South Africa.
Gross non-performing loans (“NPLs”) grew 2.8x in FY16 (FY15: 10.2% increase), largely attributable to the downgrade of one exposure (in the real estate sector) equivalent to 59.6% of NPLs at FY16. Consequently, gross NPLs amounted to 4.9% of gross loans at FY16 (FY15: 2.1%). The domestic banking industry average gross NPL ratio was 2.9% at end-2016 (2015: 3.1%). Specific provisions covered 4.2% of NPLs at FY16 (FY15: 10.8%), pre-collateral. NPLs net of provisions amounted to 25.8% of regulatory capital at FY16 (FY15: 10.4%). Cognisance is taken of the large amount of collateral held against arrears, with 70% of the NPLs in the real estate segment. Provisions plus collateral fully cover NPLs. However, despite the select clientele and highly collateralised loan book, the difficult economic and operating environment has increased downside risk for Grindrod Bank and South Africa’s financial services sector in general.
The bank registered pre-tax earnings growth of 38.6% to R197.7m for FY16 (FY15: 12.4%) supported by an expanded loan book, higher interest rates and growth in non-funded income. Key profitability indicators improved, with the ROaE and ROaA increasing to 23.8% (FY15: 20.2%) and 1.3% (FY15: 1.2%) respectively for FY16. GCR takes note of the potential loss in net fee income (making up 16.5% of total operating income in FY16 (FY15: 9.1%) owing to uncertainty surrounding the renewal of a contract with the South African Social Security Agency (“SASSA”) in which Grindrod Bank facilitates monthly grant payments for SASSA’s grant recipients through bank accounts held with the bank. The contract was renewed for one year effective 1 April 2017 (previously five years). The bank also benefits from the free float provided by the funds (around R11.2bn grant payments are processed through the bank each month) although the deposits are largely transitory and therefore ringfenced for liquidity management purposes. The bank maintains a highly liquid balance sheet which partly ameliorates liquidity risk given the reliance on short dated wholesale deposits.
Improved asset quality trends driven by low credit losses and sound underwriting, strong capital, liquidity and earnings metrics through the tough economic cycle, as well as enhanced market position, would further enhance the bank’s financial profile. Weak asset quality coupled with a significant deterioration in the bank’s profitability, liquidity and capital ratios associated with a highly challenging operating environment and/or weak credit administration, could lead to downward ratings migration. Furthermore, the international scale rating will be sensitive to changes in the sovereign rating of the country.
|NATIONAL SCALE RATINGS HISTORY||INTERNATIONAL SCALE RATING HISTORY|
|Initial rating (April 2016)||Initial rating (April 2016)|
|Long-term: BBB+(ZA); Short-term: A2(ZA)||Long-term: BB|
|Outlook: Stable||Outlook: Stable|
|Last rating (December 2016)||Last rating (December 2016)|
|Long-term: BBB+(ZA); Short-term: A2(ZA)||Long term: BB|
|Outlook: Stable||Outlook: Negative|
|Jennifer Mwerenga||Omega Collocott|
|Senior Analyst||Sector Head: Financial Institution Ratings|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2017
South Africa Bank Statistical Bulletin (September 2016)
South Africa Financial Institutions Credit Ratings Overview (January 2017)
Grindrod Bank Rating Report (2016)
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; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
Grindrod 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 has been disclosed to Grindrod Bank Limited with no contestation of the ratings.
The information received Grindrod Bank Limited and other reliable third parties to accord the credit rating(s) included:
- Audited financial results of the bank at 31 December 2016 (plus four years of comparative numbers);
- Unaudited management accounts of the bank as at 28 February 2017;
- 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, Grindrod 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
|Arrears||An overdue debt, liability or obligation. An account is said to be ‘in arrears’ if one or more payments have been missed in transactions where regular payments are contractually required.|
|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.|
|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.|
|Basel||Basel Committee on Banking Supervision housed at the Bank for International Settlements.|
|Basel I||Basel Committee regulations, which set out the minimum capital requirements of financial institutions with the goal of minimising credit risk.|
|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.|
|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.|
|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.|
|Downgrade||The assignment of a lower credit rating to a company or sovereign borrower’s debt by a credit rating agency. Opposite of upgrade.|
|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.|
|Guarantee||An undertaking in writing by one person (the guarantor) given to another, usually a bank (the creditor) to be answerable for the debt of a third person (the debtor) to the creditor, upon default of the debtor.|
|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.|
|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.|
|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.|
|Preference Share||Preference or preferred shares entitle a holder to a first claim on any dividend paid by the company before payment is made on ordinary shares. Such dividends are normally linked to an interest rate and not determined by company profits. Preference shares are normally repayable at par value in the event of liquidation. They do not usually carry voting or pre-emptive rights. Preference shares can be redeemable or perpetual.|
|Provision||The amount set aside or deducted from operating income to cover expected or identified loan losses.|
|Regulatory Capital||The total of primary, secondary and tertiary capital.|
|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.|
For a detailed glossary of terms please click here