Global Credit Ratings upgrades credit rating announcement : Investec Bank Limited’s rating to AA(ZA)

Omega Collocott, Head of Financial Institution Ratings at GCR.

Global Credit Ratings (GCR) has upgraded Investec Bank Limited’s long-term national scale rating to AA(ZA) and affirmed its short-term national scale rating at A1+(ZA); with the outlook accorded as Stable. Furthermore, GCR has affirmed the international scale local currency rating of BBB- accorded to Investec Bank Limited; with the outlook accorded as Stable.

Omega Collocott, Head of Financial Institution Ratings at GCR says the ratings of Investec Bank Limited reflect its sustainable business model, client-focussed strategy, and significant share in selected and resilient market segments. “Solid performance metrics, driven by a diversified and predominantly recurring earnings base accompanied comfortable capitalisation/liquidity, and improved funding structure and stability (to full Basel III implementation levels). However, South Africa’s challenging operating environment creates asset quality uncertainty, despite the bank’s select clientele and collateralised loan book.”

In Financial Year (FY) 2016, loan growth of 21.2%, funded primarily by a 26.4% increase in retail deposits which is in line with stable funding attraction strategies, has driven revenue growth and supported funding-based regulatory compliance metrics at full Basel III implementation levels. “The company is comfortably capitalised,” adds Collocott. “The risk-weighted capital adequacy ratios (“CAR”) moderated slightly in 2016. Risk-asset growth combined with hybrid capital phase-out provisions under Basel III drove the decline in CARs, which remained well above regulatory minima and within management targets, despite being calculated on the more conservative ‘standardised’ approach.”

FY 2016 pre-tax earnings rose 16.9% (FY 2015: 49.0%), supported by loan and funded income growth and solid transactional flows, moderated by higher impairment and operating costs.

Investec Bank Limited’s strong credit practices, and lending linked to client cash flow and collateral, reduced the gross default ratio to 1.5% at FY 2016 (FY 2015: 2.1%). Core impaired loans declined to R3.2 billion (FY 2015: R3.7 billion) due to settlements, write-offs, and lower, non-performing loans in new origination. “While provision coverage of defaults declined to 28.6% (FY 2015: 30.6%), provisions plus collateral fully cover arrears. While most metrics highlighted asset quality improvement, operating environment challenges make a reversal of this trend in the FY 2017 likely,” adds Collocott.

“The ratings fully incorporate the bank’s systemically important status, meaningful market positions in key activities, conservative financial profile, solid regulatory compliance metrics, and through-the-cycle resilience. Consequently, there is limited upside rating potential. Significant deterioration in asset or earnings quality, profitability, funding and liquidity profile, and/or capitalisation, could prompt negative rating action,” concludes Collocott