PRETORIA – The continued challenging operating conditions in South Africa’s unsecured lending market, amid subdued domestic economic growth and labour unrest in certain sectors, are the primary drivers behind the downgrading of African Bank’s national-scale issuer rating by Moody’s Investor Services.
Moody’s announced on Monday night that it had downgraded African Bank’s deposit and senior unsecured debt ratings and concurrently downgraded the national-scale issuer rating one notch to A2.za/P-1.za. This now puts African Bank’s rating on par with Capitec’s. On the same day Moody’s indicated that it had kept Capitec’s rating as is, but downgraded its outlook from positive to stable.
Despite these “challenging conditions” that Moody’s references, Capitec released a SENS announcement on Tuesday morning, acknowledging the ratings action, but also informing the market in a trading statement that a reasonable degree of certainty exists that earnings and headline earnings per share for the year ended 28 February 2013 will exceed the comparable earnings and headline earnings per share for the previous corresponding period being 29 February 2012 by between 32% and 36%.
In the rationale for the downgrading, Moody’s gives some insight into the two banks’ lending practices and provision models. It states that the downgrading of African Bank’s rating and Capitec’s outlook follows on high levels of loan growth. African Bank’s compound annual growth rate in loans, using BA900 figures from the Reserve Bank, was on 40% over the three-year period to December 2012, while Capitec’s annual compound loan growth rate was at 78% as of December 2012.
Moody’s also mentions African Bank’s increased loan sizes and tenors, but gives no detail, while it states that Capitec’s maturity of its loan book has lengthened from 29 months in February 2011 to 45 months in February 2012.
With reference to African Bank, Moody’s states that the relatively unseasoned loan portfolio of the bank faces the risk of rising levels of non-performing loans and lower recoveries. For Capitec it highlights the risk of rising levels of loan arrears and provisioning requirements as the loan book seasons, which will weigh on profitability metrics.
In the rationale, Moody’s indicates that Capitec has a comprehensive provisioning policy where the bank fully provides and writes-off all loans over 90 days in arrears. From the Moody’s document it appears that African Bank’s written off loans appear are loans overdue by more than 17.
In the case of African Bank, Moody’s also states that there is a secondary driver of the rating action that focuses on Moody’s assessment of the risks associated with African Bank’s wholesale funding profile.
“Despite a gradual diversification in the bank’s funding sources over the past few years, African Bank continues to be exclusively reliant on wholesale and market funding, with significant concentrations to a small number of financial institutions,” the rating agency states, adding that this type of funding profile remains confidence-sensitive and susceptible to market disruptions. The A2.za/P-1.za ratings indicate that both companies are still comfortably investment grade and have a superior ability to repay short-term debt obligations.