Fitch Affirms FirstRand Bank Limited at ‘BB-‘ with a Stable Outlook
The Long-Term Issuer Default Rating (IDR) of ‘BB-‘ for FirstRand Bank Limited (FRB) also known in Ghana as First national Bank (FNB) has been confirmed by Fitch Ratings. The future looks promising.
Issuer Default Ratings (IDRs) for FirstRand Bank Limited (FRB) are determined by the bank’s standalone creditworthiness, as evidenced by its “bb-” Viability Rating (VR). The bank’s strong domestic business profile, high profitability, cosy capital buffers, and steady funding and liquidity are all reflected in the VR.
The following restriction, however, causes the VR to be one notch lower than the assumed VR of “bb”: Rating for the operating environment and sovereign. This emphasises the bank’s activities’ focus on South Africa and the large sovereign-related exposure compared to equity—about three times at the end of the first half of 23.
In comparison to other South African issuers, the bank’s National Ratings indicate its creditworthiness in local currency.
Fitch predicts a 0.5% real GDP growth in 2023 (2022: 1.9%), followed by a 0.9% modest recovery in 2024, taking into account the effects of the oil crisis, declining net exports, and weakening domestic demand amid low private spending. Although higher policy rates improve bank profits, the risk costs are higher as a result of less resilient borrowers.
KEY RATING DRIVERS
Strong Domestic Franchise: FRB has a market share of roughly 21% and is the second-largest bank in South Africa in terms of total assets. It has three independently branded enterprises with strong market positions that house its local operations. The bank’s key market is South Africa, where 87% of its on-balance-sheet credit risk assets were as of the end of June 2023 (FYE23). FRB is completely owned by the publicly traded FirstRand Limited (FRL), and its management team and company profile are solid.
Asset-Quality Risks Increased: Due to greater loan growth and write-offs, FRB’s Fitch-adjusted impaired loans ratio (Stage 3 loans under IFRS 9) remained constant at 4.3% at FYE23 (FYE22: 4.4%). At 83% (FYE22: 91%), the total reserve coverage of problematic loans was adequate. In the current macroeconomic climate, we anticipate that asset-quality risks will continue through 2023–2024, notably in household loans.
Superior profitability: The company’s profitability remained high, with an operating profit/risk-weighted asset ratio of 4.1% in FY23 (up from 4.5% in FY22) that was higher than that of its competitors. Wide margins, still-moderate but rising impairment charges, and effective cost management have all contributed to it. Due primarily to greater impairment charges and a little slowdown in growth, we anticipate this key indicator to moderate slightly in 2024.
Adequate Capitalization: The FRB’s common equity Tier 1 (CET1) ratio, which excludes unappropriated profits, was 12% at FYE23 (FYE22: 12.2%), comfortably exceeding the regulation minimum of 8.5% and largely in line with peers. In FY24, we anticipate that the CET1 ratio will stay over 12%, helped by robust internal capital growth.
Stable Funding and Liquidity: At the end of FYE23, the bank’s Fitch-adjusted loans-to-customer deposits ratio was 89%, which was lower than pre-pandemic levels and generally in line with peers. FRB relies on short-term institutional finance, which is a structural aspect of South Africa’s large banks, despite having low levels of foreign funding. A significant amount of liquidity buffers counteracts this. The bank’s liquidity coverage and net stable financing ratios at FYE23 were stable and comfortably over the legal requirement of 100%, at 129% and 120%, respectively.
SENSITIVITIES FOR RATING
Factors That May Result in a Downgrade or Negative Rating Action, Individually or Collectively;
- A fall in South Africa’s sovereign rating would result in downgrades for the bank because FRB’s Long-Term IDR and VR are bound by that country’s rating.
- A material weakening in capitalization, as shown by a drop in the CET1 ratio below 10%, which may be caused by greater-than-anticipated asset-quality deterioration or more aggressive shareholder distributions, may also lead to a downgrade of the Long-Term IDR and VR
- Changes in FRB’s creditworthiness in comparison to other South African issuers are likely to affect its national ratings.
