Cape Town - Global Credit Ratings (GCR) on Wednesday affirmed the national scale ratings assigned to Grindrod Bank of BBB+ and A2 in the long term and short term respectively, with the outlook accorded as stable.
“Grindrod Bank’s ratings reflect its established and streamlined business model (offering niche banking products and services to private, corporate and institutional clients in South Africa), its sound standalone financial profile, and demonstrated financial support from its parent, Grindrod Limited,” Omega Collocott, head of financial institution ratings at GCR, said in a statement on Wednesday.
Grindrod Bank facilitates monthly grant payments as part of Net1 Cash Payment Solutions’ controversial contract with the South African Social Security Agency (Sassa).
The GCR said it noted the potential loss in net fee income, making up 16.5% of total operating income in 2016 (2015: 9.1%), due to the future uncertainty of this contract.
“This is owing to uncertainty surrounding the renewal of a contract with the South African Social Security Agency in which Grindrod Bank facilitates monthly grant payments for Sassa’s grant recipients through bank accounts held with the bank,” said Collocott.
The contract was renewed for one year effective 1 April 2017 (previously five years).
In March, the Constitutional Court ordered Sassa to extend Net1 UEPS Technologies' contract to distribute grants to more than 17 million beneficiaries for a year to avoid a “potential catastrophe” and slammed the government’s handling of the programme.
In the ruling, the court said the contract extension with Net1’s Cash Paymaster Services unit must continue on the same terms as the previous agreement that expires on March 31, Bloomberg reported.
Grindrod Bank said it needs Net1’s support to continue the welfare system.
“The bank also benefits from the free float provided by the funds, around R11.2bn grant payments are processed through the bank each month, although the deposits are largely transitory and therefore ring fenced for liquidity management purposes," GCR said.
“The bank maintains a highly liquid balance sheet, which partly ameliorates liquidity risk given the reliance on short dated wholesale deposits.
“Improved asset quality trends driven by low credit losses and sound underwriting, strong capital, liquidity and earnings metrics through the tough economic cycle, as well as enhanced market position, would further enhance the bank’s financial profile.”
GCR said the bank’s risk appropriate capitalisation and conservative risk appetite mitigate to an extent its structural reliance on confidence sensitive wholesale funding.
“These strengths are, however, partially offset by an increasingly challenging economic climate and consequent weakening credit environment,” it said.
The bank is a subsidiary (96.6%) of Grindrod Limited, an established freight, shipping and financial services group with operations in South Africa, rest of Africa and Asia.
The group had a consolidated capital base of R15.8bn and assets of R39.1bn for the financial year ended 31 December 2016.
The bank registered pre-tax earnings growth of 38.6% to R197.7m in 2016 (2015:12.4%) supported by an expanded loan book, higher interest rates and growth in non-funded income.
“However, weak asset quality coupled with a significant deterioration in the bank’s profitability, liquidity and capital ratios associated with a highly challenging operating environment and/or weak credit administration, could lead to downward ratings migration.” Collocott said.Read Fin24's top stories trending on Twitter: Fin24’s top stories