S&P: African Bank outlook revised to stable on higher capital; 'B+/B' ratings affirmed
S&P Global Ratings today revised its outlook on South Africa-based African Bank Ltd. to stable from negative. At the same time, we affirmed our 'B+/B' long- and short-term counterparty credit ratings on the bank.
“We also raised our long-term South Africa national scale rating on African Bank to 'zaBB' from 'zaBB-' and affirmed the 'zaB' short-term South Africa national scale rating.
“The outlook revision and raising of the national scale rating reflect a significant improvement in African Bank's capitalization because of a reduction in the balance sheet combined with somewhat better earnings than we expected. Nevertheless, earnings remain subdued. In addition, given the fact that the bank's balance sheet is mainly wholesale-funded, it is more susceptible to future investor confidence.
“African Bank has a diminished franchise, resulting from the failure of its predecessor and a monoline business model that compares unfavorably with hat of domestic banking sector peers. Management is attempting to diversify revenues (and funding) and produce greater underlying initiatives by improving its product offering to its clientele and establishing long-term commercial partnerships.
“Because of better-than-anticipated earnings and significant shrinkage of the balance sheet, we have revised our capital and earnings assessment to very strong from strong. We now expect that the bank's risk-adjusted capital ratio will remain above 20 per cent for the next couple of years. This makes it the best capitalized bank in South Africa, but this is appropriate for the higher level of risk that it is exposed to in relation to its unsecured retail loan book.
“However, we anticipate that earnings will remain weaker than domestic peers' over the next few years. This reflects our opinion that interest margins will remain squeezed, balancing a rising cost of funds with a higher yielding asset mix and inherently high credit losses.
“We continue to assess the bank's risk position as weak, reflecting inherently high normalized credit costs. Because of the entity's focus on unsecured consumer lending, as well as its volatile track record, we expect the group's loan loss experience to be considerably higher than that of other universal South African banks that operate with more-diversified, lower-loss, and lower-margin loan products. It is our opinion that African Bank's risk costs and net charge-offs will be around 11 per cent and 10 per cent, respectively, over the next couple of years. Although not our base-case scenario, we also note the risk of a spike in inflation or unemployment, resulting from the recent political headwinds.
“African Bank's funding is less diversified and more confidence-sensitive than its peers', but it currently has strong levels of liquidity and very limited medium-term refinancing risks. We think funding pressures may rise in the future, depending upon the confidence sensitivity of the domestic investor base, particularly in providing longer-term funds. As a result, the bank may become more reliant on short-term funding in the next 18 months.
“We apply no uplift for group or sovereign support because we consider African Bank to be of low systemic importance and government support of creditors to be uncertain. Shareholders have provided no on-balance-sheet or committed off-balance-sheet funding facilities, which raises risk for this post-resolution bank that is reliant on the wholesale capital markets for funding.
“The stable outlook balances African Bank's very strong capital levels and limited medium-term refinancing risks against the current weak economic environment that could negatively impact its earnings and business stability. We also take into account the longer-term risk that, given its mainly wholesale-funded balance sheet, the bank is more susceptible to low investor confidence that could threaten its funding, earnings, and wider business stability.
“We could take a negative rating action if the economic or credit environment weakens, possibly through increased unemployment, higher inflation and interest rates, or deteriorating rule of law and corruption in South Africa. A negative rating action could also follow a prolonged period of weak earnings, or weaker provisioning, which threatened the bank's capitalization or undermined the business model and therefore investor confidence. Or it could result from a material shortening of funding terms or heightened cost of funds, which exacerbated refinancing risk.
“We consider a positive rating action to be unlikely in the next 12 months as it would require an improvement in the funding profile of the bank, with less susceptibility to investor confidence, demonstrated by the bank having access to long-term funds at a cost that allowed earnings to steadily improve and ongoing evidence that management's actions to improve the stability and diversification of the business model were taking shape.”