Sasfin : Credit Rating Announcement

Rating

BBB+(ZA)

A2(ZA)

B

B

Outlook/Watch

Rating Watch

Evolving

Stable

Rating scale

National

National

International

International

Rating class

Issuer Long term Issuer Short term Issuer Long term Issuer Short term

CREDIT RATING ANNOUNCEMENT

GCR affirms Sasfin Bank Limited's national scale issuer credit ratings of BBB+(ZA)/A2(ZA) with a Ratings Watch Evolving following the announced asset disposal. At the same time, GCR affirms the B/B international scale ratings with a Stable Outlook.

Rating action

Johannesburg, 18 December 2023 - GCR Ratings (GCR) has affirmed the South African long and short-term national scale issuer ratings of Sasfin Bank Limited at BBB+(ZA)/A2(ZA). GCR has concurrently affirmed the international scale long and short-term issuer ratings of B/B. GCR placed the national scale ratings on Ratings Watch Evolving and the international scale ratings on Stable Outlook. This following the announced disposal of Sasfin Holdings Limited's Capital Equipment Finance Business (CEF Business), Commercial Property Finance Business (CPF Business).

Rated entity

Sasfin Bank Limited

Rating rationale

The ratings assigned to Sasfin Bank Limited (Sasfin, the bank) are based on the credit profile of the group, Sasfin Holdings Limited, and its subsidiaries. The ratings are supported by the moderately strong capital and leverage position, good liquidity levels against the funding structure. The ratings are constrained by weaker than average asset quality and a modest competitive position.

We have placed the national scale ratings on Watch Evolving to reflect the proposed sale of their CEF Business and CPF Business to African Bank Limited. On the upside we could see a material improvement in the capitalisation and funding / liquidity risks of the issuer, due the cash consideration paid to Sasfin and reduction in RWAs. We expect the GCR capital ratio to remain within the 16.0% level until the conclusion of the sale when the expected GCR capital ratio is to register more than 20.0% whilst the leverage ratio to remain more than 10.5%.

We could also see the return on asset and equity increase and the entity look more profitable on a ratio basis. The reported cost-to-Income ratio remains high at 85.4% at 30 June 2023 from 82.9% the year prior. The group is making clear efforts to reduce costs whilst improving internal controls and management structures.

On the downside, the scale will decrease, and the entity will look to rebuild into its competitive advantages and core lending strengths going forward. The CEF Business and CPF Business represented around 24% of total assets and around 27% of total interest income at 30 June 2023. Asset quality may also look weaker in the short term. Credit Loss Ratio (CLR) has been reported at 1.25% for June 2023 from 0.25% at 30 June 2022.

South Africa ⎪ Financial Institutions ⎪ Public Rating

GCR expect the CLR to record around 1.25% for the next 6 - 12 months. GCR expect the non-performing loans (NPLs) to increase to around 12.5% (10.4% at June 2023), following the sale, as capital equipment assets yield lower credit risk. This is counterbalanced by our expectation that gross interest margins will proportionally improve due to equipment finance attracting higher interest rates albeit at higher relative origination costs for smaller loan sizes.

Outlook statement

The Rating Watch Evolving outlook assigned to the national scale rating reflects GCR's expectation that Sasfin's competitive position and asset quality may weaken on conclusion of the sale. This is counterbalanced by an expectation that the overall financial profile should improve on account of higher capital and leverage assessments, whilst cost savings and marginally higher interest income crystalise to improve earnings. The Stable outlook assigned to the international scale rating considers the beforementioned that would in itself not translate to a ratings migration.

Rating triggers

GCR may revise the national scale ratings upward should the GCR capital and leverage ratios be sustained at elevated levels and NPLs and through the cycle credit losses moderate to levels similar to those of larger banks. The ratings may also be upgraded should the group sustain exceptional liquidity metrics with an improvement of the funding structure and reduced reliance on wholesale funding. Conversely, should asset quality deteriorate beyond expectations with NPLs above 12.5% and CLR more than 1.5% and the GCR capital ratio falls to below 15.0% on a consistent basis with the leverage ratio below 10.0%, negative ratings action may arise. A reduction in competitive position or offering could also bring down the ratings.

The international scale is less likely to move negatively, although we do see a positive move more likely, due to the stability of the rating versus the national scale.

Analytical contacts

Primary analyst	Corné Els	Sector Head: Financial Institutions
Johannesburg, ZA	[e-mail]	[phone]
Committee chair	Matthew Pirnie	Group Head of Ratings
Johannesburg, ZA	[e-mail]	[phone]

Related criteria and research

Criteria for the GCR Ratings Framework, January 2022

Criteria for Rating Financial Institutions, May 2019

GCR Ratings Scale, Symbols & Definitions, May 2019

GCR Country Risk Scores, December 2023

GCR Financial Institutions Sector Risk Score, June 2023

South Africa ⎪ Financial Institutions ⎪ Public Rating

Ratings history

	Sasfin Bank Limited
	Rating class	Review	Rating scale	Rating class	Outlook	Date
		Initial	National	BBB+(ZA)	Stable	May 2016
	Long Term issuer	Last	National	BBB+(ZA)	Stable	August 2023
	Initial	International	BB	Stable	May 2016
		Last	International	B	Stable	August 2023
		Initial	National	A1-(ZA)	N/a	May 2016
	Short Term issuer	Last	National	A2(ZA)	N/a	August 2023
	Initial	International	B	N/a	July 2021
		Last	International	B	N/a	August 2023

Risk score summary

Rating Components & Factors	Score
Operating environment	14.50
Country risk score	7.00
Sector risk score	7.50
Business profile	(3.00)
Competitive position	(3.00)
Management and governance	0.00
Financial profile	0.25
Capital and Leverage	0.75
Risk	(0.50)
Funding and Liquidity	0.00
Comparative profile	0.00
Group support	0.00
Peer comparison	0.00
Total Risk Score	11.75

South Africa ⎪ Financial Institutions ⎪ Public Rating

Glossary

	Advance	A lending term, to transfer funds from the creditor to the debtor.
	Affirmation	See GCR Rating Scales, Symbols and Definitions.
	Asset Quality	Refers primarily to the credit quality of a bank's earning assets, the bulk of which comprises its loan portfolio, but
		will also include its investment portfolio as well as off balance sheet items. Quality in this context means the
		degree to which the loans that the bank has extended are performing (ie, being paid back in accordance
		with their terms) and the likelihood that they will continue to perform.
	Asset/s	A resource with economic value that a company owns or controls with the expectation that it will provide
		future benefit.
	Capital	The sum of money that is invested to generate proceeds.
	Cash	Funds that can be readily spent or used to meet current obligations.
	Collateral	Asset provided to a creditor as security for a loan or performance.
	Core Deposits	That portion of a bank's deposits that is relatively stable and has a predictable cost. Deposits fluctuate
		seasonally and cyclically, but even in adverse circumstances, deposits normally do not fall below some
		minimum level.
	Credit Risk	The possibility that a bond issuer or any other borrowers (including debtors/creditors) will default and fail to pay
		the principal and interest when due.
	Demand	A deposit of funds that can be withdrawn without any advance notice, or "on demand".
	Deposit
	Income	Money received, especially on a regular basis, for work or through investments.
	Insurance	Provides protection against a possible eventuality.
	Interest Rate	The charge or the return on an asset or debt expressed as a percentage of the price or size of the asset or
		debt. It is usually expressed on an annual basis.
	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.
	International	An opinion of creditworthiness relative to a global pool of issuers and issues.
	Scale Rating
	Issuer Ratings	See GCR Rating Scales, Symbols and Definitions.
	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.
	Liabilities	All financial claims, debts or potential losses incurred by an individual or an organisation.
	Liquid Assets	Assets, generally of a short term, that can be converted into cash.
	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.
	Loan	A sum of money borrowed by a debtor that is expected to be paid back with interest to the creditor. A debt
		instrument where immovable property is the collateral for the loan. A mortgage gives the lender a right to take
		possession of the property if the borrower fails to repay the loan. Registration is a prerequisite for the existence
		of any mortgage loan. A mortgage can be registered over either a corporeal or incorporeal property, even if it
		does not belong to the mortgagee. Also called a Mortgage bond.
	Loss	1. A tangible or intangible, financial or non-financial loss of economic value. 2. The happening of the event for
		which insurance pays (insurance).
	Margin	A term whose meaning depends on the context. In the widest sense, it means the difference between two
		values.
	National Scale	National scale ratings measure creditworthiness relative to issuers and issues within one country.
	Rating
	Origination	A process of creating assets.
	Performing	A loan is said to be performing if the borrower is paying the interest on it on a timely basis.
	Loan
	Performing	An obligation that performs according to its contractual obligations.
	Property	Movable or immovable asset.
	Rating Outlook	See GCR Rating Scales, Symbols and Definitions.
	Rating Watch	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.

South Africa ⎪ Financial Institutions ⎪ Public Rating

Securitisation	A process of repackaging portfolios of cash-flow producing financial instruments into securities for sale to third
	parties.
Short Term	Current; ordinarily less than one year.
Upgrade	The rating has been raised on its specific scale.

South Africa ⎪ Financial Institutions ⎪ Public Rating

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 the rated entity.

The ratings above were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings.

The rated entity participated in the rating process via management meetings, as well as other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information received from the rated entity and other reliable third parties to accord the credit ratings included:

• Audited Annual Finance Statements as at 30 June 2023;
• A breakdown of facilities available and related counterparties; and
• Other relevant information.

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