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General Findings. 26 March 2009. - National Development Bank - Development Bank of Namibia - Development Bank of Mauritius. How were the ratings assigned?. Based on Support Standalone ratings. Support. > Long-term IDR assigned based on Long-term IDR of the sovereign - PowerPoint PPT Presentation
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General Findings
26 March 2009
- National Development Bank- Development Bank of Namibia- Development Bank of Mauritius
How were the ratings assigned?
> Based on Support
> Standalone ratings
Support
> Long-term IDR assigned based on Long-term IDR of the sovereign
> High levels of support from sovereign factored into Long-term IDR
> Higher rated sovereign’s supported higher IDRs
> Highest IDR rating assigned did not imply strongest bank
> Factors impacting the assessment of support
– Ownership structures
– Support letters
– Access to capital/callable capital
– Ability to call capital promptly
– Role the bank plays – key developmental role/government initiative
– Legislation/Act of Parliament
– Past history of support/assumption of previous DFI assets
– Government funding and government guaranteed funding
– Size relative to commercial banking sector – re bailout
Standalone ratings
> Modus operandi to provide development finance
> Banks assumed to be taking on higher risk
> Profit maximisation is not key/rather sustainable financial performance– Pre-provision profits sufficient to cover risk costs and support growth
> Corporate Governance/Risk Management assessment
> Corporate Governance– Improvements required to ensure a strong and independent board
– Board experience
– Key executive appointments to the board
– Balance between executive/non-executive directors
– Not formally regulated
– Related party lending
Financial performance> Weak levels of financial performance
– Profit maximisation not an objective – Given the development focus would expect low levels of profitability – Sustainable profitability– Suspended interest included in revenues– Loans provided at concessionary/subsidised rates
> Interest margins low> Given narrow margins overall levels of profitability sensitive to funding changes
– Inadequate provisioning for NPLs– Impairment provisioning insufficient to cover suspended interest– High cost to income ratios– Benign economic environment
Risk Management
>Risk management requires attention- key committees do not exist- key risk management absent from committees
- segregation of duties in certain institutions unclear- additional committees recommended (large exposures)- concentrations in credit risk by sector, obligor
- enhancement of further policies>Credit risk perceived be significant
Source: Fitch survey
Credit Risk> High levels of inherent credit risk> High levels of loans in arrears> Limited monitoring of loans> Inconsistent reporting of NPLs> Coverage ratios for NPLs considered to be low> Given the operational risks, coverage ratios could be even lower> Unseasoned loan book> Long-tenured facilities
Market Risk
> Unsophisticated risk systems
> Unable to measure interest rate risk
> Foreign exchange risk considered low
> Market risk arising from equity and property investments high
Other Assets
> Significant property investments– Material revaluation reserves supporting shareholder funds
– Valuation issues
– Market risk implications
– Extent of “Free Capital”
> Equity investments– Valuation issues
– Market risk implications
– Extent of “Free Capital”
Operational Risk
> Operational systems considered to be weak
> Difficulty in determining ownership of key functions and responsibilities
> Operational risk considered to be high as a result of basic procedures and controls for loan monitoring
Funding
> Absence of a ALCO Committee and or treasury department
> Certain institutions benefit from government/government guaranteed funding
> Funding franchises perceived to be underdeveloped and in some instances untested
> Most institutions are not deposit taking or an unregulated deposit taker
> Funding is largely wholesale based
Liquidity
> Low levels of liquidity
> Refinancing risk
> No evidence of stress testing
> No evidence of back-up lines
> Funding franchise
> Ability to access Central Bank funding
Capitalisation
> Contrasting levels of capitalisation
> Degree of “free capital”
> High level of unreserved NPLs
> Quality of earnings and sustainability
> Dividend payments
Global trends
How Far through the Crisis are we?
The Greatest Challenges Facing Banks
Diagnosis: Business Models in the Spotlight
Pressure on domestic profitability
Financial innovation and international
expansion
Strong credit growth in domestic and emerging
markets
Overheating in credit markets
Refocus on domestic markets
and traditional business model
Symptoms: The Greatest Challenges Facing Banks
C: Capital raising required
A: Asset quality deterioration, exposures to Emerging Markets
M: Management
E: Earnings’ weakness
L: Liquidity and funding pressures
Asset Quality – Peak to Trough Impaired Loans
4.9%
0.9%0.7%
3%2.7%
7-8%
9.0 -10.0%
6-7%
4.5-5.5%
6-7%
0
2
4
6
8
10
12
France Germany Italy Spain UK
(%) Low High?
Source: National authorities, Fitch estimates
Funding Availability
Four stages1. Bank systemic crisis2. Mistrust/counterparty risk3. Hoarding liquidity for fear of own
position4. Hoarding with some lending to
supported banks– Usage of the central bank liquidity
facilities continues (ECB, SLS)– Government guaranteed debt
programmes continue to emerge– The most unpredictable part of the
financial crisis is behind us.
Profitability Takes a Turn for the Worst
> Profitability, the first buffer and pressures are mounting…
> Reduced appetite for lending
> Pressure on net interest margins
> Fee and commission income highly correlated to economic cycle
> Rising impairment charges
Capital Raised, More Required?
Total capital raised by European banks in ’08 & ‘09
Top 10 European capital raisers
Source: Bloomberg, as at 9 March 2009
0 10 20 30 40 50
Lloyds TSB
Santander
ING
BayerischeLandesbank
Fortis
HBOS
Commerzbank
Barclays
UBS
RBS
(USDbn)0
20
40
60
80
100
120
Q108 Q208 Q308 Q408 Q109
(USDbn)
Deleveraging – Limited Alternatives
> Banks’ Preferred Option – Change Mix of Assets/Risk Weighted Assets…
…but takes time since quick fixes such as financial engineering no longer acceptable
> Banks’ Less Desirable Option – Raise Capital...
…even though shareholders have conceded some dilution, earnings prospects are worse and some have been burnt by bail outs
> Banks’ Least Desirable Option – Selling Assets…
…non-core asset sales and not renewing maturing lending is unlikely to be sufficient
Outlook for Banks
> Real economy impact growing
– Recession in many developed economies and impact on emerging markets
– Fear of deflation (and even depression)
> Higher credit risk costs for most banks
> Earnings for most banks are likely to be under pressure, until 2010 or beyond!
> Capital is under pressure, the bar is heightened, capital is being raised
> Central banks are still providing much of the market liquidity
> Shrinkage of off-balance sheet business (ABCP conduits, SIVs)
> Deleveraging slow and painful
The Changed World Global Rating Stock
-20
-15
-10
-5
0
5
10
Q1
05
Q2
05
Q3
05
Q4
05
Q1
06
Q2
06
Q3
06
Q4
06
Q1
07
Q2
07
Q3
07
Q4
07
Q1
08
Q2
08
Q3
08
Q4
08
Global Developed Markets Emerging Markets
(Ratio of Positive to Negative Outlooks)
Enhancements to credit quality> Sovereign ratings> Perceptions of support> Government guaranteed funding> Sustainable financial performance> Corporate governance and risk management improvements> Asset quality> Adequate provisioning> Levels of capitalisation> Funding franchises> Liquidity
Enhancements to credit quality
> Multilateral banks
– Preferred creditor status, example African Development Bank
– SADC banks do not benefit from this and therefore in weaker position given their target market
– ADB has significant callable capital
– Shareholding of sovereign’s with AA and AAA ratings
> significant driver of rating uplift for ADB
– In the absence of a regulatory environment has a negative impact on ratings
– Generally credit concentrations higher than commercial banks which leads to lower ratings
Conclusion
Questions
Your contact at Fitch
Anthony Walker
Telephone +27 11 380 0912Senior Director
[email protected] Institutions
