GCR affirms Standard Bank ratings of AA+/A1+ and BB/B, revises outlooks to stable
Rating agency, GCR, has affirmed Standard Bank of South Africa’s unsolicited national and international scale issuer ratings of AA+(ZA)/A1+(ZA) and BB/B respectively, whilst revising the outlooks to Stable.
The unsolicited international and national scale ratings on Standard Bank of South Africa reflect the strengths and weaknesses of the Standard Bank Group Limited, a large and geographically diverse financial institution domiciled in South Africa.
Standard Bank, parent bank of Stanbic Bank, is regarded as the core operating entity within the group and accounts for around 75.7% of group assets. Accordingly, the ratings of Standard Bank are equalised to the group Anchor Credit Evaluator.
The group’s credit profile is supported by its strong competitive position, being one of the largest financial services companies across the continent and holding a market-leading position in the core South African banking arena.
The capital position improved, in line with peers based on strong earnings and moderate loan growth, while asset quality also remained strong, adding, “we have also made a positive adjustment to the funding and liquidity assessment given our view of an above peer funding structure, while maintaining strong liquidity”.
The group’s credit strength is derived from its strong competitive profile, including its leading position in the South African market and good levels of regional dispersion, supporting risk diversification.
The group also provides a broad range of products which is further refined into different business segments and sub segments, including partnerships with large non-bank financial institutions that adds another layer of income diversification. These are important building blocks for long term revenue stability (particularly in stressed market conditions), and positively impacts the rating, with a competitive positioning score above the major peer grouping. The group further benefits from its sizeable presence in the insurance and wealth/asset manager segments through Liberty Holding Limited.
The group is adequately capitalised, with a Common Equity Tier 1 (“CET 1”) ratio of 12.8% at Q1 F22 (12.8% at FY21), marginally better than the industry and peer average. Earnings are expected to sustain its improvement the rising interest rate environment, whilst transaction volumes and new originations are expected to show robust growth from the year-on-year net loans and advances growth of 12.0%. The GCR capital ratio is expected to align with peers, ranging from 13.0% – 13.5% for the group over the next 18 months.
Asset quality is in line with peers albeit reporting a 7.6% growth of group assets which is largely on account of the South African banking activities.
The reported credit loss ratio for banking activities in December 2021 was 0.71% (1.51% in December 2019), with Consumer and High Net Worth at 1.37% (2.31% in December 2020), Business & Commercial at 1.24% (2.16% in December 2020) and Corporate and Investment Banking at -0.04% (0.59% at December 2020).
GCR said it expects credit losses to range between 85 and 100 bps for the next 12 to 18 months which is largely supported by the macroeconomic headwinds pressurising retail consumers.
The funding and liquidity assessment was improved slightly the based on above peer Net Stable Funding Ratio (“NSFR”) while maintaining sound liquidity across the group. The group is exposed to the same structural funding risks of the other top tier South African banks, i.e., medium-term wholesale funding concentrations with financial corporates. The group reported NSFR of 121.1% at quarter one, 2022. Complimenting this, is the good liquidity position, with a group reported Liquidity Coverage Ratio (“LCR”) of 141.4% at quarter one, 2022.
Outlook Statement
The stable outlook reflects GCR’s expectations that earnings will follow a similar trend to that of FY21, which should support elevated capital metrics. Asset quality is expected to withstand macro-economic headwinds, whilst credit losses are projected below 100bps for the next 18 months. The funding and liquidity profile (NSFR and LCR ratios) are expected to remain at elevated levels.
Rating Triggers
GCR said its unlikely to revise the ratings upward in the next 12 to 18 months, however, should the GCR capital ratio be more than 14.0% with below peer non-performing loans and credit losses whilst maintaining above average funding structure and liquidity.
Should asset quality deteriorate beyond expectations and the GCR capital ratio falls to below 10% on a consistent basis, then negative ratings action may arise. Downward ratings movement could also stem from a weakening in the operating environment of the group’s core exposures.
