Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDRs) of
The Outlooks are Stable.
Fitch has placed IBL's Government Support Rating (GSR) of 'b+' on Rating Watch Negative (RWN), reflecting the expectation that bank resolution legislation will be implemented in
A full list of rating actions is below.
Key Rating Drivers
INL's and IBL's IDRs are driven by their standalone creditworthiness, as expressed by their Viability Ratings (VR) of 'bb-'. The VRs reflect a strong niche franchise and revenue diversification, resilient loan quality, healthy earnings, comfortable capital buffers and high liquidity coverage. However, the VRs are one notch below the implied VR of 'bb' due to the following constraint: Operating Environment/Sovereign Rating. This reflects the concentration of activities in
The National Ratings reflect the entities' creditworthiness in local currency relative to that of other South African issuers. They are in line with all other rated banks in the country.
VRs Equalised with Group VR: INL is a non-operating bank holding company (BHC). Its VR is equalised with the group VR, reflecting the consolidated risk assessment of the group, despite high double leverage as senior debt at BHC level is mainly represented by intra-group liabilities and fungibility of capital and liquidity within the group is high. As the main operating entity (92% of group assets at
Global Risks to Weigh on Growth: Fitch expects
Strong Niche Franchise: INL only accounted for a moderate 7% of banking system assets at
Conservative Underwriting Standards: INL focuses on HNW clients with a high and sustainable income stream, which results in a more resilient customer base than that of peers. Underwriting standards are conservative, and sectoral and single-borrower credit concentration is moderate. INL has a higher exposure to riskier non-loan assets, including equities (50% of the common equity Tier 1 (CET1) capital at end-March 2022).
Resilient Loan Quality: INL's impaired loans (Stage 3 loans under IFRS 9) ratio (1.9% at
Healthy Profitability: Profitability is healthy but weaker than that of the big four banks due to a narrower net interest margin. Revenue diversification is strong, with non-interest income consistently representing over 40% of operating income. Operating returns on risk-weighted assets (RWAs) improved significantly to 2.7% in FY22 (the financial year to
Comfortable Capital Buffers: The CET1 ratio (excluding unappropriated profits) increased to 12.7% at
Liquidity Offsets Funding Weakness: The funding structure is weaker than that of peers due to a higher reliance on costly deposits from HNW individuals and financial corporates. However, these weaknesses are offset by large holdings of liquid assets, as reflected by a low 72% gross loans/customer deposits ratio at
Rating Sensitivities
Factors that could, individually or collectively, lead to negative rating action/downgrade:
The entities' VRs and Long-Term IDRs are constrained by
A downgrade of the VRs and Long-Term IDRs could also result from a material weakening in capitalisation, as indicated by the CET1 ratio declining below 10%, which could stem from greater-than-expected asset-quality deterioration, investment portfolio losses or more aggressive shareholder distributions.
INL's VR could be notched off the group VR due to persistently high double leverage with higher reliance on third-party liabilities at the BHC.
INL's and IBL's National Ratings are sensitive to a weakening creditworthiness relative to other South African issuers.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
An upgrade of the VRs and Long-Term IDRs would require a sovereign upgrade while maintaining healthy financial metrics.
INL's and IBL's National Ratings are sensitive to strengthening creditworthiness relative to other South African issuers.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
IBL's senior unsecured debt is rated in line with its IDRs as the likelihood of default on these obligations reflects the likelihood of default of the entity. Its subordinated debt is rated two notches below its anchor National Long-Term Rating, reflecting poor recovery prospects. Criteria for alternative notching, including a sufficient qualifying junior debt buffer, are not met.
IBL's GSR of 'b+' reflects a limited probability of support from the South African authorities, if required, given IBL's systemic importance.
INL's GSR of 'no support' reflects Fitch's view that government support is unlikely to extend to BHCs due to their low systemic importance and liability structure, including foreign/wholesale funding, which could be politically acceptable to bail-in.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
IBL's senior unsecured debt ratings are sensitive to a change in its IDRs, while its subordinated debt rating is sensitive to a change in its anchor National Long-Term Rating.
Once the resolution framework is implemented, Fitch expects to downgrade IBL's GSR to 'no support', reflecting our view that notwithstanding the bank's systemic importance, the South African authorities' propensity to support the banking system will no longer be certain. We do not expect the RWN to be resolved in the next six months.
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visitwww.fitchratings.com/esg.
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