Grindrod Bank Credit Rating
The ratings of Grindrod Bank Limited (“Grindrod”, or “the bank”) balances its weak competitive position against excellent liquidity, resilient asset quality that held up well amidst the challenging operating environment, and adequate capital and leverage.
Competitive position is constrained by the bank’s limited scale, with a market share of 0.2% of total industry assets and deposits at December 2020 respectively. Loan book growth was comparatively high in FY20 at 10.1% with the trend expected to continue into FY21. While loan growth amongst rated second tier peers was muted, the bank is more geared towards wholesale lending and continued to disburse funds during the last 12 months, albeit under more stringent vetting procedures. The bank’s target market is Small Medium Enterprises (“SME”) with emphasis placed on established businesses with a history of strong cash-flow generation. Lending to vulnerable sectors such as retail trade increased by 58.4% to 5.9% of the total loan portfolio at FY20. Real estate lending continues to make up the majority of advances comprising 59.9% of the total portfolio.
The bank’s risk position is a positive ratings factor given the resilient asset quality with key metrics continuing to compare favourably to peers. Whilst the GCR calculated Credit Loss Ratio (“CLR”) increased to 1.27% at FY20, from 0.33% at FY19, at these levels, they are still viewed to be below the peer average. Furthermore, non-performing loans (>90 days) were well contained at 3.6%.
The higher credit losses in FY20 (R101m vs. R25m) was due in part to the challenging operating environment and non-granular portfolio of loan advances. Grindrod has adequate collateral covering the classified, impaired or non-performing loans and advances. All real estate collateral undergoes annual internal desktop valuations. The bank’s commercial property exposure to the office sector is c.11% of all mortgages or c.5% of all loan types at May ’21 focusing on single name tenants with long leases for office sector lending. Nearly all accounts that had loan concessions granted during the pandemic are current with revised repayment arrangements.
The funding and liquidity assessment is a positive ratings factor. The bank’s core deposits (except for Insurance, Pension and Private financial corporate sectors) as a percentage of total deposits was 86.4% at 31 December 2020. Depositor concentrations are mostly towards corporate banking at 51.2%, retail banking at 8.8% and notice / fixed deposits at 34.1% for FY20. The June 2021 Senior Unsecured Notes issuance of R400m priced well below the R263m notes it replaced which is indicative of the bank being a reoccurring issuer and a shortage of investable assets. The total Domestic Medium-Term Notes in issuance increased to R650m at end June 2021 from R513 at December 2020. The bank also maintained exceptional regulatory liquidity metrics, with a Liquidity Coverage Ratio (“LCR”) of 553% at 31 March 2021 (453% at 31 December 2020) in comparison to the required minimum of 80%. The Net Stable Funding Ratio was sustained at 129% for both 31 March 2021 and 31 December 2020.
Capital and leverage is adequate with the GCR total capital ratio forecast at around 14.0% (standardised approach). Above average loan growth over the past 12-18 months resulted in risk weighted asset growth outstripping commensurate capital growth. The previously highlighted breach of the minimum capital ratio requirement has since been remedied with the bank reporting a total capital ratio of 14.7% at FY20. We believe the GCR total capital ratio may moderate on the back of strong loan growth expectations and potential moderation of earnings.
Outlook Statement
The outlook on the national scale ratings is stable as we anticipate asset quality to remain resilient with the bank’s CLR expected to be well contained below 1% over the medium term, while Non-performing loans may track below peers at around 3%. Liquidity strength is also expected to be maintained while capital is likely to register around 14.0% over the medium term given GCR’s loan growth and earnings expectations.