GCR affirms Limited’s national scale long term issuer rating of A(ZW), with an Evolving Outlook

Rating Action

Johannesburg, 04 September 2020 – GCR Ratings (“GCR”) has affirmed Nedbank Zimbabwe

Limited’s national scale long term and short term issuer ratings of A(ZW) and A1(ZW) respectively, with an Evolving Outlook.

Rated Entity Rating class Rating scale Rating Outlook/Watch

Nedbank Zimbabwe Limited Long Term issuer National A(ZW) Evolving Outlook

Short Term issuer National A1(ZW)

Rating Rationale

The national scale issuer ratings on (“Nedbank Zimbabwe”, “the bank”) take into account the bank’s adequate albeit constrained capitalisation, a relatively stable funding structure and good local currency liquidity, offset by a weaker business profile in comparison to domestic top tier banks. The outlook is reflective of the adverse operating conditions exacerbated by a hyperinflationary environment and unstable monetary policy resulting in a potentially more volatile financial profile. The outlook also reflects the adverse ramifications of the on-going COVID-19 pandemic on the environment.

The business profile is a ratings negative. The bank has a modest competitive position in comparison to rated peers reflected by below average market shares and business line diversification. Franchise strength is sound, reflected partly by very low cost of funds. Revenue stability and creation is broadly in-line with banking sector peers with a high reliance on non-funded income (90% at 30 June 2020).

Management & governance is a neutral rating factor, supported by the bank’s position in one of Africa’s largest financial groups. However, going forward a lack of transparency (in regards to the timeliness and quantity of information provided) from Nedbank Zimbabwe may become a negative ratings factor. In the above consideration, GCR takes into account the high risk of value erosion of the monetary assets and capital as a result of hyperinflation and exchange rate devaluation.

Capitalisation is adequate supported by a high GCR leverage ratio, offset by relatively weaker earnings quality characterised by increasing amounts of market sensitive income in the form of foreign exchange gains. The bank’s GCR leverage ratio was 11.5% at 30 June 2020 and is expected to range between 11% and 13% in the next 12 months given the current dynamics. Earnings quality was a moderate rating negative, reflected by revenue stability risk characterised by increasing reliance on market sensitive income which is susceptible to the volatile monetary policy. We expect additional pressure on profitability taking into account constrained internal capital generation balancing the impact of hyperinflation on the net monetary asset balance sheet offset by growth in foreign currency (“FX”) income. Given the adverse operating conditions, reserve coverage was adequate.

The risk profile is a neutral ratings factor. Nedbank Zimbabwe’s low gross non-performing ratio of below 0.2% at 30 June 2020 was offset by high market risk and moderately high single name concentrations with the top 20 exposures contributing between 50% and 60% to total exposures. Initial assessments of the potential impact of the COVID-19 pandemic indicate that the bank will not be immune to the sector wide challenges which include credit extension and loan repayments. Though not significant, we expect some deterioration in asset quality and increased credit losses on account of the COVID-19 impact on some sectors and the deterioration of the exchange rate on FX .

The funding and liquidity assessment is a ratings positive taking into account an average funding structure and adequate liquidity. The bank is exposed to the same structural funding as most banks in Zimbabwe, namely demand customer deposits. The majority of deposits come from large corporates and business banking clients which typically are less behaviourally sticky than retail deposits. Therefore, the bank remains susceptible to external shocks, further exacerbated by the challenging operating environment and foreign currency shortages. However, liquidity is good mitigating structural funding risks. At 30 June 2020, FX liquid asset coverage of the FX funding base was very good at 164%. Furthermore, GCR liquid asset coverage of customer deposits was adequate in the range of 85% to 100%.

The ratings benefit from support and integration of the bank with its parent, Nedbank Limited, although not a material asset or revenue contributor. Nedbank Group directly holds a 66.02% shareholding in Nedbank Zimbabwe with the balance of 33.98% shared between Zimbabwe (20.46%) and three others which have between 2% and 5%.

Outlook Statement

The outlook is evolving premised on the volatile operating environment, monetary policy, exacerbated by hyperinflation creating high likelihood of frequent change on the financial profiles of financial institutions operating therein. In this regard, GCR will increase monitoring and surveillance of rated peers.

Rating Triggers

National scale ratings reflect relativities to the local Zimbabwean peers only. Given the operating environment there is implied volatility in the ratings. A positive or negative ratings movement could follow a change in capitalisation, asset quality or liquidity.

Analytical Contacts

Primary analyst Vimbai Muhwati Financial Institutions Analyst Johannesburg, ZA [email protected] +27 11 784 1771

Committee chair Corné Els Senior Structured Finance & Securitisation Analyst Johannesburg, ZA [email protected] +27 11 784 1771

Related Criteria and Research

Criteria for the GCR Ratings Framework, May 2019 Criteria for Rating Financial Institutions, May 2019 GCR Ratings Scales, Symbols & Definitions, May 2019 GCR Country Risk Scores, May 2020 GCR Financial Institutions Sector Risk Score, August 2020 Jurisdictional Supplement for Criteria, July 2020 Ratings History

Nedbank Zimbabwe Limited

Rating class Review Rating scale Rating Outlook/Watch Date

Long Term issuer Initial National A(ZW) Stable Outlook August 2017

Short Term issuer Initial National A1(ZW) August 2017

Long Term issuer Last National A(ZW) Stable Outlook July 2019

Short Term issuer Last National A1(ZW) July 2019

Risk Score Summary

Rating Components & Factors Risk Scores

Operating environment 1.00 Country risk score 0.00 Sector risk score 1.00

Business profile (1.00) Competitive position (1.00) Management and governance 0.00

Financial profile 3.00 Capital and Leverage 2.00 Risk 0.00 Funding and Liquidity 1.00

Comparative profile 1.00 Group support 1.00 Government support 0.00 Peer analysis 0.00

Total Score 4.00

Glossary

Balance Sheet Also known as Statement of Financial Position. A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been financed. Capital The sum of money that is invested to generate proceeds. Cash Funds that can be readily spent or used to meet current obligations. Debt An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period. Diversification Spreading risk by constructing a portfolio that contains different exposures whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in. Exposure Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For a company, its exposure may relate to a particular product class or customer grouping. Exposure may also arise from an overreliance on one source of funding. In insurance, it refers to an individual or company’s vulnerability to various risks Income Money received, especially on a regular basis, for work or through investments. Interest Scheduled payments made to a creditor in return for the use of borrowed money. The size of the payments will be determined by the interest rate, the amount borrowed or principal and the duration of the loan. Issuer The party indebted or the person making repayments for its borrowings. Leverage With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt. Liquidity The speed at which assets can be converted to cash. It can also refer to the ability of a company to service its debt obligations due to the presence of liquid assets such as cash and its equivalents. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price. Long Term Rating See GCR Rating Scales, Symbols and Definitions. Margin A term whose meaning depends on the context. In the widest sense, it means the difference between two values. Market An assessment of the property value, with the value being compared to similar properties in the area. Maturity The length of time between the issue of a bond or other security and the date on which it becomes payable in full. Rating Outlook See GCR Rating Scales, Symbols and Definitions. Risk The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives. Short Term Rating See GCR Rating Scales, Symbols and Definitions. Short Term Current; ordinarily less than one year.

SALIENT POINTS OF ACCORDED RATING

GCR affirms that a.) no part of the rating process was influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

The credit ratings have been disclosed to Nedbank Zimbabwe Limited. The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings.

Nedbank Zimbabwe Limited participated in the rating process via video conference management meetings, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.

The information received from Nedbank Zimbabwe Limited and other reliable third parties to accord the credit ratings included:

The audited financial results to 31 December 2019 Unaudited interim results as at 30 June 2020 Breakdown of facilities Other related documents.