Johannesburg, 24 Jul 2015—Global Credit Ratings has accorded national scale ratings to AFB (Ghana) Plc of BB(GH) and B(GH) in the long term and short term respectively; with the outlook accorded as Stable. The ratings are valid until May 2016.
SUMMARY RATING RATIONALE
Global Credit Ratings (““GCR””) has accorded the above credit rating(s) to AFB (Ghana) Plc (““AFB Ghana””, ““the company””) based on the following key criteria:
The ratings reflect the developing/diversifying lending model and strong risk and operational management structures of AFB Ghana, which is a subsidiary of AFB (Mauritius) Limited (““AFB Mauritius””, ““the group””), from which it currently obtains significant capital/funding, strategic and systems support. The company’’s growth prospects within the context of financial inclusion (a key theme on the African continent) and the presence of mobile and related technologies which enable the inclusion of dispersed populations with limited income into the formal financial system, were also considered. In addition, the rating considers AFB Ghana’’s prospects, the likelihood that it will require regular capital injections given its high growth strategy and loan funding requirements, as well as uncertainty in the Ghanaian macroeconomic environment, which resulted in a c.35% devaluation of the Ghanaian Cedi (““GHS””) vs. USD in F14 and continued volatility in F15 to date.
AFB Ghana experienced a number of challenges in F14, including foreign exchange losses arising as a result of the company’’s currency mismatched balance sheet and GHS devaluation, attendant regulatory solvency issues (now rectified) which resulted from the aforementioned losses, and moderating loan growth/higher write-offs due to a government payroll audit.
In F13-14, AFB Ghana’’s efforts at increasing the quantum of external (non-group) and local currency funding (in order to mitigate currency risk) was met with some success. AFB Ghana set up its first Medium-Term Note Programme (““MTNP””) in F13 to raise GHS-denominated funding. Debt raised through this MTNP totalled GHS27.8m at FYE14 (FYE13: GHS13.8m). This Programme requires AFB Ghana to maintain a coverage ratio (of receivables/net debt) of 150%. No breaches have been noted to date. AFB Ghana also raised a mezzanine loan totalling USD12.0m during F13. In F14, high levels of USD-denominated funding in AFB Ghana exposed the company to foreign currency losses, which overshadowed profits from operations. As such, replacing USD with GHS-denominated funding is a priority. AFB Ghana is in the process of issuing GHS30m (through its listed MTNP) to replace its USD-denominated mezzanine loan and a portion of shareholder funding, reducing currency exposure. Hedging has not been considered to be cost effective/practical to date.
Higher than expected write-offs combined with the foreign exchange loss in F14 resulted in additional capital being raised, in 1Q F15. A USD3.0m group loan was converted to equity, improving AFB Ghana’’s capital/assets ratio from a low 7.1% at FYE14 to a comfortable 18.0% in January 2015, boosting solvency and gearing ratios to comfortable levels, in compliance with the requirements of the Bank of Ghana (AFB Ghana’’s regulator) and debt covenants.
AFB Ghana’’s net loans (mainly unsecured card and salary deduction (payroll) loans) increased by less than 1% to GHS68.2m in F14 (F13: 19.5%). Asset quality improved, with past due and impaired loans totalling 8.0% of gross loans in F14 (F13: 21.0%). Total loan loss reserves were maintained at 10% of gross loans in both F13 and F14. In part, loan book credit quality was better due to higher write-offs (16.7% of average gross loans in F14 vs. 6.6% in F13), driven by challenging collection conditions in Ghanaian payroll lending, including government measures to halt salary payments to civil servants whose banking details are not captured in the payroll system.
AFB Ghana posted an after-tax loss of GHS7.8m (F13: profit of GHS3.2m), comprising stable income at the operating level, negatively impacted by higher write-offs and a foreign exchange loss of GHS17.7m (F13: GHS8.7m). As discussed, the listed MTNP should reduce the exposure to GHS/USD currency movements, diminishing earnings volatility.
High volatility in capital/leverage ratios has been noted, and the company’’s capital buffers are likely to experience regular strain given its high growth strategy, and loan funding requirements. High capital consumption is likely to remain until local operations are bedded down and become more cash generative, and structural risks have been addressed. In particular, during F14, the cash flow risks of funding domestic business with foreign currency loans manifested. As such, while the group’’s intention is to ultimately replace group funding to AFB Ghana with domestically-raised debt, the group’’s role in contributing capital, debt funding, and strategic/operational support, remains significant. Consequently, structural and management changes at group level will need to be evaluated in the context of constraints to future capital/funding access by the company. Consequently, AFB Ghana’’s prospects and ratings depend on management’’s ability to reduce currency exposure, continued group support (ensuring the receipt of fresh funding/capital inflows when required) and conversion of its early-arriver advantage to grow its loan book profitably.
Expansion of the company’’s market profile, lower profit/cash flow volatility, improved diversification/risk metrics in the capital and funding structure, and enhanced asset quality and track record of portfolio collections would benefit the rating/s in the medium term. Reduction of the business’’ profile in its chosen market segments, challenges raising funding/capital to support growth, above expectation credit losses, and persistent weak profitability could negatively impact the rating/s.
|NATIONAL SCALE RATINGS HISTORY|
|Initial/last rating (May 2014)|
|Long term: BB(GH); Short term: B(GH)|
Sector Head: Financial Institution Ratings
Sector Head: Structured Finance Ratings
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2015
Global Criteria for Rating Microfinance Institutions, updated March 2015
RATING LIMITATIONS AND DISCLAIMERS
ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.NET/RATINGS-INFO. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.NET.
SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
AFB (Ghana) Plc participated in the rating process via teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit rating/s has been disclosed to AFB (Ghana) Plc with no contestation of the rating.
The information received from AFB (Ghana) Plc and other reliable third parties to accord the credit rating(s) included:
- Audited financial results at 31 December 2014;
- Five years of comparative numbers (where available);
- Budgeted financial statements;
- Management accounts to 31 March 2015;
- Latest internal and/or external reports to management;
- A breakdown of facilities available and related counterparties; and
- Corporate governance and enterprise risk framework.
The ratings above were solicited by, or on behalf of, AFB Ghana Plc, and therefore, GCR has been compensated for the provision of the ratings.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S FINANCIAL INSTITUTIONS GLOSSARY
|Asset||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|Asset Quality||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 (i.e. being paid back in accordance with their terms) and the likelihood that they will continue to perform.|
|Balance Sheet||Also known as a Statement of Financial Position. A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been financed.|
|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|Capital||The sum of money that is invested to generate proceeds.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|Covenant||A provision that is indicative of performance. Covenants are either positive or negative. Positive covenants are activities that the borrower commits to, typically in its normal course of business. Negative covenants are certain limits and restrictions on the borrowers’ activities.|
|Credit Rating||An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.|
|Credit Rating Agency||An entity that provides credit rating services.|
|Credit Risk||The possibility that a bond issuer or any other borrowers (including debtors/creditors) will default and fail to pay the principal and/or interest when due.|
|Creditworthiness||An assessment of a debtor’s ability to meet debt obligations.|
|Currency risk||The potential for losses arising from adverse movements in exchange rates.|
|Debt||An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.|
|Diversification||Spreading risk by constructing a portfolio that contains different investments, whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.|
|Equity||Equity (or shareholders’ funds) is the holding or stake that shareholders have in a company. Equity capital is raised by the issue of new shares or by retaining profit.|
|Exchange||A standardised marketplace in which different assets are traded.|
|Exchange Rate||The value of one country’s currency expressed in terms of another.|
|Gearing||With regard to corporate analysis, gearing (or leverage) refers to the extent to which a company is funded by debt.|
|Hedging||A financial risk management process or function to take a market position to protect against an eventuality. Taking an offsetting position in addition to an existing position. The correlation between the existing and offsetting position is negative.|
|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.|
|Long term||Not current; ordinarily more than one year.|
|National Scale Rating||The national scale provides a relative measure of creditworthiness for rated entities only within the country concerned. Under this rating scale, a ‘AAA’ long term national scale rating will typically be assigned to the lowest relative risk within that country, which in most cases will be the sovereign state.|
|Portfolio||A collection of investments held by an individual investor or financial institution. They may include stocks, bonds, futures contracts, options, real estate investments or any item that the holder believes will retain its value.|
|Provision||The amount set aside or deducted from operating income to cover expected or identified loan losses.|
|Rating Outlook||A Rating outlook indicates the potential direction of a rated entity’s rating over the medium term, typically one to two years. An outlook may be defined as: ‘Stable’ (nothing to suggest that the rating will change), ‘Positive’ (the rating symbol may be raised), ‘Negative’ (the rating symbol may be lowered) or ‘Evolving’ (the rating symbol may be raised or lowered).|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Risk Management||Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy.|
|Short Term||Current; ordinarily less than one year.|
|Write-off||The total reduction in the value of an asset.|