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

Rating Action

Johannesburg, 15 July 2021 – GCR Ratings (“GCR”) has affirmed ’s national scale long and short-term issuer ratings of A(ZW) and A1(ZW) respectively, with an Evolving Outlook.

Rated Entity Rating class Rating scale Rating Outlook

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 Limited (“Nedbank Zimbabwe”, “the bank”) reflect the bank’s modest market position in the domestic market, adequate albeit constrained capitalisation, a stable funding structure and good liquidity. The ratings also factor in implicit group support provided by the parent company, Nedbank Group Limited. The outlook is reflective of the adverse operating conditions exacerbated by the on-going COVID-19 pandemic, a hyperinflationary environment and unstable monetary policy resulting in a potentially more volatile financial profile.

The bank has a modest competitive position in comparison to rated peers reflected by average market shares and business line diversification. Generally, lending is low, particularly foreign currency (“FCY”). Resultantly, Nedbank Zimbabwe had a low -to-deposit ratio (“LDR”) of 16% (FCY: 5%) in April 2021. Franchise strength is sound, reflected partly by low cost of funds and good brand association. Revenue stability and creation is broadly in-line with banking sector peers with a high reliance on non-funded income. Revenue diversification may benefit from increasing FCY income channels by growing the FCY loan book, among others. In the above consideration, GCR also takes into account the risk of value erosion of the net monetary balance sheet and capital as a result of hyperinflation and exchange rate devaluation.

Capitalisation is adequate albeit constrained. At 31 December 2020, the bank had a GCR Capital ratio and GCR leverage ratio of 18% and 8% respectively. As of June 2021, while the bank was in compliance with the current regulatory capital requirements (ZWL100m), core capital was well below the regulatory target of USD30m by 31 December 2021 at the prevailing interbank rate. The capital plan includes meeting the target via organic growth. Given the mix in the capital base between local and foreign currency denominated assets, compliance with the USD30m target will be impacted by the volatility in the exchange rates. We expect pressure on profitability to persist, balancing the impact of hyperinflation on the net monetary asset balance sheet offset by value preservation strategies. Given the adverse operating conditions, reserve coverage was adequate.

The risk profile is a neutral ratings factor balancing relatively lower single name concentrations against top rated peers and a slightly higher than industry average (0.3%) gross non-performing loan (“NPL”) ratio of 0.5% at 31 March 2021 (FY2020: 0.4%). Based on sectoral trends during the second half of 2020 and year to date 2021, the percentage of borrowers under some form of payment relief has reduced. Accordingly, while longer term risks still linger, over the short to medium term, we expect asset quality to improve. We also expect exposure diversification should the bank increase FCY lending.

The funding and liquidity assessment is a ratings positive taking into account a relatively stable funding structure and good liquidity. The bank is exposed to the same structural funding as most banks in Zimbabwe, namely demand customer deposits. Most customer deposits come from non- financial corporates, as a result, the bank remains susceptible to external shocks, further exacerbated by the challenging operating environment. Single name concentrations were in line with top rated banks. Positively, liquidity is good on the back of a strong FCY balance sheet mitigating structural funding risks. Although a function of the economy, the local currency liquidity position continues to be strained. The bank’s regulatory liquidity ratio of 117% in April 2021 was above the regulatory minimum ratio of 30%. Furthermore, the GCR liquid asset coverage of customer deposits was a strong 98% at 31 December 2020.

The ratings benefit from support and integration of the bank with its ultimate parent, Nedbank Group Limited. The 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 maintain stringent monitoring and surveillance of rated entities.

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. The ratings may be lowered if there is evidence of lower group support, either implied or explicit. The ratings are also susceptible to regulatory capital forbearance.

Analytical Contacts

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

Committee chair Vinay Nagar Senior Financial Institutions 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, July 2021 GCR Financial Institutions Sector Risk Score, June 2021 Jurisdictional Supplement for Criteria, July 2020

Ratings History

Nedbank Zimbabwe Limited Rating class Review Rating scale Rating Outlook 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) Evolving Outlook September 2020

Short Term issuer Last National A1(ZW) September 2020

Risk Score Summary

Rating Components & Factors Risk Scores

Operating environment 1.00 Country risk score 0.00 Sector risk score 1.00

Business profile 0.25 Competitive position 0.25 Management and governance 0.00

Financial profile 1.25 Capital and Leverage 0.25 Risk 0.00 Funding and Liquidity 1.00

Comparative profile 1.50 Group support 1.50 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 2020 Unaudited management accounts to 31 May 2021 Breakdown of facilities Other related documents.

Due to severe foreign currency shortages, hyperinflation and significant monetary and exchange control policy changes over the last 12-18 months in our opinion, the national scale credit ratings on Zimbabwean entities are not directly comparable to credit ratings and risk scores within other markets. Furthermore, outlook statements may fail to capture forward looking trends due to the extreme volatility in the operating environment and audited opinions. See the latest Jurisdictional Supplement for Criteria, published July 2020.