Moody's downgrades African Bank
Global rating agency Moody's today downgraded by one notch African Bank Limited's deposit and senior unsecured debt ratings to Baa3/Prime-3, from Baa2/Prime-2. The baseline credit assessment has also been lowered to ba1 from baa3, within the D+ standalone bank financial strength rating. Concurrently, Moody's has downgraded African Bank's national-scale issuer ratings to A2.za/P-1.za from A1.za/P1.za, and the provisional rating on its EMTN subordinated debt programme to (P)Ba2 from (P)Ba1. All ratings now carry a stable outlook.
This rating action reflects Moody's assessment of the risks associated with (1) the continued challenging operating conditions in South Africa's unsecured lending market, which will likely weigh on African Bank's financial performance; and (2) the bank's concentrated wholesale funding profile, which is susceptible to market disruptions.
The primary rating driver of today's rating action is Moody's view that the risks associated with the continued challenging operating conditions in South Africa's unsecured lending market, amid subdued domestic economic growth and labour unrest in certain sectors, will weigh on African Bank's asset quality and profitability metrics. Specifically, following a high level of loan growth (with a compound annual growth rate of 40% over the three-year period to December 2012, based on bank BA900 disclosures with the South African Reserve Bank) and substantially increased loan sizes and tenors, Moody's notes that African Bank's relatively unseasoned loan portfolio faces the risk of rising levels of non-performing loans (NPLs) and lower recoveries.
Moody's adds that the risk of weakening asset quality, specifically higher NPLs and lower recovery rates, would likely also exert pressure on African Bank's profitability through: (1) higher provisioning requirements on both new and existing NPLs (provision- ing coverage accounted for 59% of NPLs -- loans overdue by 3 to 17 months, as of September 2012); and (2) losses in the bank's written-off loans (loans overdue by more than 17 months), which are "fair valued" according to past recovery rates and carried in the bank's balance sheet.
The secondary driver of the rating action is Moody's assessment of the risks associated with African Bank's wholesale funding profile, within the context of challenging operating conditions. 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.
While Moody's acknowledges the long-standing relationship with the bank's largest counterparties and the bank's active asset and liability maturity matching, the rating agency believes that such a funding profile remains confidence-sensitive and susceptible to market disruptions.