Moody's assigns ratings to Absa Bank's and Barclays Africa Group's DMTN programmes
Moody's Investors Service (Moody's) has assigned provisional senior unsecured local currency rating of (P)Baa3 to the ZAR60 billion Domestic Medium Term Note (DMTN) programme of Absa Bank Limited (Absa Bank), and (P)Ba1 to the ZAR30 billion DMTN programme of Barclays Africa Group Limited (BAGL).
Both ratings are in line with Absa Bank's Baa3 (negative) long term deposit rating and BAGL's Ba1 (negative) long term issuer rating.
The (P)Baa3 local currency rating assigned to the senior unsecured class of notes of Absa Bank's existing DMTN programme is aligned with its Baa3 long-term deposit rating, reflecting that the senior instruments issued under the programme will be direct, unconditional, unsubordinated and unsecured obligations of Absa Bank and rank equally with all other unsecured and unsubordinated obligations of Absa Bank.
Absa Bank's ratings reflect its consistently solid profitability, with a ratio of H1 2017 normalised net income-to-assets of around 1.1 per cent and increasing liquidity buffers due to its stock of high quality liquid assets increasing by 32.1 per cent during 2016. Capitalisation has also improved with a reported normalised Common Equity Tier 1 (CET1) ratio at 11.9 per cent as of June 2017, up from 10.5 per cent as of December 2015, while the bank's reported non-performing loans ratio of 3.3 per cent of gross loans is broadly in line with similarly-rated international peers.
However, the ratings also capture the challenging operating conditions, which expose Absa Bank to asset quality pressures, and the bank's partly wholesale funding profile. They also capture its high exposure to South African government securities, which links the bank's credit profile to that of the sovereign.
The (P)Ba1 local currency rating assigned to the senior unsecured class of notes of BAGL's existing DMTN programme is aligned with its Ba1 long-term issuer rating, reflecting that the senior instruments issued under the programme will be direct, unconditional, unsubordinated and unsecured obligations of BAGL and rank equally with all other unsecured and unsubordinated obligations of BAGL.
BAGL's Ba1 issuer rating is positioned one notch below Absa Bank's ratings, its wholly-owned subsidiary and main operating entity of the group. BAGL is a non-operational entity and its issuer rating is mainly driven by the structural subordination of its creditors to those of Absa Bank.
The rating also captures BAGL's good capital buffers, with a normalised CET1 ratio of 12.1 per cent as of June 2017 and an equity-to-assets ratio of 9.3 per cent as of the same date. It also reflects: its solid profitability metrics, with reported normalised return on equity of 16.8 per cent; rising liquidity buffers; and the group's extensive sub-Saharan Africa operations that provide diversification benefits and growth potential.
However, the rating also encapsulates the challenging operating conditions–in both South Africa and the wider sub-Saharan Africa region–which expose BAGL to asset quality pressures, as well as BAGL's partly wholesale funding profile, which exposes the bank to shifts in investor sentiment. BAGL also faces operational and performance risks relating to Barclays Bank PLC's sale of a majority stake in the unit, although these are partly mitigated by Barclays' GBP765 million contribution to BAGL and the transitional services arrangement that will allow BAGL to use the Barclays brand outside South Africa until May 2020.
All ratios reported as "normalised" have been adjusted for the financial consequences of BAGL's separation from Barclays PLC.
There is limited upwards rating momentum for the Group's and the Bank's senior unsecured programme ratings over the near-term given the negative outlook on their issuer and deposit ratings, which is driven by the negative outlook on the sovereign ratings and the challenging operating conditions.
As indicated by the negative outlook on the sovereign rating, any deterioration in the creditworthiness of South Africa would exert downward pressure on Absa Bank's and BAGL's ratings. In addition, ratings could be downgraded if operating conditions worsen more than currently anticipated, leading to significantly higher loan loss provisions that prompt deterioration in earnings and capital metrics that exceed the rating agency's expectations.