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GCR affirms FirstRand Bank Limited’s rating of AA(ZA);outlook positive

21 November 2016 GCR

Global Credit Ratings has affirmed the national scale ratings assigned to FirstRand Bank Limited of AA(ZA) and A1+(ZA) in the long-term and short-term respectively; with the outlook accorded as Positive. Furthermore, Global Credit Ratings has affirmed the international scale local currency rating assigned to FirstRand Bank Limited of BBB-; with the outlook accorded as Stable.

Summary rating rationale

Global Credit Ratings (“GCR”) has accorded the above credit ratings of FirstRand Bank Limited (“FRB”, “the bank”) based on the following key criteria:

The ratings of FRB reflect its solid position as one of South Africa's largest financial institutions, with a 21.4% assets market share, and a significant corporate and retail business base. Furthermore, the ratings capture FRB’s strong risk management infrastructure and resilient financial performance, underpinned by good asset quality metrics, and sound capitalisation and earnings generation. These strengths are, however, partially offset by an increasingly challenging economic climate and consequent weakening credit environment.

The positive outlook on the long-term national scale rating is supported by market position increases over time, and capitalisation and Basel 3 liquidity/funding metric enhancements, accompanied by stable profitability which exceeded peer averages.

FRB (a wholly owned subsidiary of FirstRand Limited) operates a decentralised structure with separate brands for each of its three main divisions, namely: First National Bank (retail and commercial banking); Rand Merchant Bank (corporate and investment banking); and WesBank (instalment finance).

The bank has maintained its strong capital position, with risk-weighted capital adequacy ratios (“CAR”) remaining well above both the regulatory minima and internal targets. FRB’s Tier 1 CAR declined to 14.2% at FYE16 (FYE15: 14.6%) due to a 10% haircut on hybrid capital that is not recognised under Basel 3. Notwithstanding this, total CAR increased to 17.1% at FYE16 (FYE15: 16.9%), supported by the issuance of Tier 2 subordinated debt instruments amounting to R4.9bn. Furthermore, emphasis is being placed on maintaining the Basel 3 leverage ratio (a supplementary measure to the CARs) above the regulatory minimum and internal target of 4% and 5% respectively.

As a consequence of South Africa’s high indebtedness levels, poor employment prospects, higher interest rates, adverse commodity cycle, the continued deterioration in the macro environment, and the bank’s subsequent reduced risk appetite, retail and wholesale loan growth moderated in the period under review. Due to the aforementioned operating environment challenges, coupled with the reclassification of distressed loans, the bank’s gross non-performing loan (“NPL”) ratio increased to 2.5% at FYE16 (FYE15: 2.2%), while total provisioning coverage declined to 60.1% at FYE16 (FYE15: 64.9%). Notwithstanding this, asset quality indicators are still considered healthy, with provisions plus collateral fully covering arrears. The bank maintains stringent underwriting standards, rigorous post-disbursement monitoring and strong recovery procedures.

Although loan growth and higher interest rates supported a 17.6% increase in net interest income, as well as an improvement in the net interest margin, FRB’s pre-tax earnings grew by a lower 8.3% to R23.4bn in F16 (F15: 20.5%), constrained by a reduction in fair value gains and a rise in impairment charges. Reflecting continual cost containment measures, the bank’s cost ratio declined to 54.4% in F16 (F15: 56.4%). ROaE moderated to 22.7% (F15: 23.4%), while ROaA remained flat at 1.7% in F16.

The bank continues to build its deposit base and optimise its funding profile within structural and regulatory constraints. Given market conditions and the regulatory environment, the bank increased its holdings of liquid assets by utilising new market structures and the South African Reserve Bank committed liquidity facility. In this regard, FRB registered a Liquidity Coverage Ratio of 102% at FYE16, exceeding the 70% minimum phase in requirement. Furthermore, the bank estimates that it already exceeds the Net Stable Funding Ratio full implementation minimum requirement.

While GCR expects FRB to remain resilient, the prevailing macroeconomic challenges, coupled with ongoing political and policy uncertainty, increases downside risk for the bank’s assets quality indicators and earnings generation.

GCR has taken a positive view of the bank’s Basel 3 metrics, and simultaneous performance stability. The maintenance of healthy asset quality indicators, sound capitalisation and steady earnings may have a positive impact on the ratings. The national scale ratings will be sensitive to a deterioration in asset quality, long-term earnings prospects and capital/liquidity from current levels. Furthermore, the international scale rating will be sensitive to changes in the sovereign rating of the country.

The ratings above are unsolicited and accorded based on publicly available information.

 

 

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