Johannesburg, 29 September 2017 — Global Credit Ratings (“GCR”) has assigned national scale ratings to Untu Capital Limited of BB(ZW) and B(ZW) in the long term and short term respectively; with the outlook accorded as Positive. The ratings are valid until September 2018.
SUMMARY RATINGS RATIONALE
The initial ratings assigned to Untu Capital Limited (“Untu” or “the company”) reflect its small size, relatively short operating history, modest financial profile, acceptable liquidity and returns, and strong capitalisation, within the context of a highly challenging operating environment.
As a Microfinance Institution (“MFI”), Untu provides funding to Zimbabwean micro, small and medium sized enterprises (“MSMEs”), which have limited access to bank/traditional financing. Untu acquires its clients through direct marketing and the primary target markets for its lending activities are urban and semi-urban MSMEs. The broader client base comprises the rural and agricultural MSMEs, as well as self- employed and employed individuals. The company is a wholly owned subsidiary of Untu Holdings Limited incorporated in Botswana.
Untu is a non-deposit taking MFI and is registered and supervised by the Reserve Bank of Zimbabwe (“RBZ”) under its Microfinance Act subjected to non-prudential regulation. The company mainly competes with 181 licensed credit-only MFIs and four deposit-taking MFIs, as well as 13 commercial banks.
Although regulatory guidelines do not stipulate minimum prudential ratios for non-deposit taking MFIs, GCR views the company’s capital metrics as strong. Untu had a total risk-weighted capital adequacy ratio of 38.9% (FY15: 39.4%) at FY16, well above the 12% regulatory minimum for deposit taking MFIs, which provides a solid buffer against capital attrition given the risk profile of the company.
The company’s net advances grew at a compound annual growth rate of 65.7% since 2012. Untu’s asset quality by impaired loans deteriorated during FY16, largely as a result of a 3x rise in non-performing loans (“NPLs”) resulting in a higher gross NPL ratio. The gross NPL ratio rose from 1.4% at FY15 to 3.9% at FY16 after a steady decline from 18.4% at FY12 (FY13: 6.0%; FY14: 3.7%). The rise in NPLs was driven by a system upgrade resulting in numerous small balances being written off. GCR takes note of subsequent recoveries made, which led to a decline in the gross NPL ratio to 1.4% at 1H FY17. Annually reported NPL ratios are a relatively blunt credit quality measure given the short tenure of the loans, averaging 3-24 months. Untu accepts either hard or soft collateral depending on the loan type and amount.
Debt securities of USD2m constituted the majority of funding (48.5%) at FY16, supplemented by equity (41.7%). Shareholder loans contributed a significantly lower 9.8% to funding at FY16 compared to 21.1% at FY15. Over the past year the company has reduced foreign debt given the scarcity of foreign currency on the local market and is now predominantly funded through local sources. Untu entered into an agreement with African Guarantee Fund (“AGF”) were it will guarantee 50% of the USD5m the company seeks to raise in the form of unsubordinated debentures (“the Note”) issuance with maturities of 12, 24 and 36 months issued in three tranches. The Notes will be governed by Zimbabwean Law and will be listed on either the Zimbabwe Stock Exchange or Finsec.
Untu became profitable in FY13 registering a profit before tax of USD8,000 (FY12: USD14,000 loss). PBT dipped in FY15 due to high impairment charges and operating costs, subsequently rising 27.9% in FY16 as a result of 4.6% and 60.5% growth in net interest and other income, against a backdrop of rising operating expenditure (7.4%) mainly reflected in staff costs. Overall, in FY15 and FY16, Untu delivered ROaA of 5.6% and 16.5% respectively and ROaE of 16.5% and 27.2% respectively.
The ratings could improve over the short term, should the company successfully issue the Notes, which would increase funding diversification and enhance support through guarantees. Over the medium term, positive rating movement could transpire if a demonstrated track record of stable/improving profitability and asset quality indicators, while maintaining very strong capitalisation, and operational scale, and/or strengthening extraordinary support assumptions. Heightened credit risk, funding/capital constraints, and/or weakness in earning drivers, could exert downward pressure on the company’s ratings.
|NATIONAL SCALE RATINGS HISTORY|
|Initial/last rating (September 2017)|
|Long-term: BB(ZW); Short-term: B(ZW)|
|Senior Credit Analyst|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2017
Global Criteria for Rating Microfinance Institutions, updated March 2017
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 ratings were based solely on the merits of the rated entity, security or financial instrument being rated; c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
Untu Capital Limited participated in the rating process via management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit ratings have been disclosed to Untu Capital Limited with no contestation of the ratings.
The information received from Untu Capital Limited and other reliable third parties to accord the credit ratings included:
- Audited financial results of the company to 31 December 2016 (plus four years of comparative numbers);
- Unaudited management accounts as at 30 June 2017;
- Budgets for 2017;
- A breakdown of facilities available and related counterparties;
- Corporate governance and enterprise risk framework; and
- Information specific to the rated entity or industry.
The ratings above were solicited by, or on behalf of, the rated client, 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||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.|
|Capital||The sum of money that is invested to generate proceeds.|
|Capital Adequacy||A measure of the adequacy of an entity’s capital resources in relation to its current liabilities and also in relation to the risks associated with its assets. An appropriate level of capital adequacy ensures that the entity has sufficient capital to support its activities and that its net worth is sufficient to absorb adverse changes in the value of its assets without becoming insolvent.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Cash Equivalent||An asset that is easily and quickly convertible to cash such that holding it is equivalent to holding cash.|
|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.|
|Customer Deposit||Cash received in exchange for a service, including safekeeping, savings, investment, etc. Customer deposits are a liability in a bank’s books.|
|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.|
|Impairment||Reduction in the value of an asset because the asset is no longer expected to generate the same benefits, as determined by the company through periodic assessments.|
|Initial Public Offering||The first offering of shares to the public by a privately or state owned company. IPOs are used by companies to raise new funds, or to achieve a listing on a stock exchange.|
|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.|
|Liquidity Risk||The risk that a company may not be able to meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets. Regarding securities, the risk that a financial instrument cannot be traded at its market price due to the size, structure or efficiency of the market.|
|Long-Term||Not current; ordinarily more than one year.|
|Long-Term Rating||Reflects an issuer’s ability to meet its financial obligations over the following three to five year period, including interest payments and debt redemptions. This encompasses an evaluation of the organisation’s current financial position, as well as how the position may change in the future with regard to meeting longer term financial obligations.|
|Margin||The rate taken by the lender over the cost of funds, which effectively represents the entity’s profit and remuneration for taking the risk of the loan; also known as spread.|
|Past Due||Any note or other time instrument of indebtedness that has not been paid on the due date.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Short-Term||Current; ordinarily less than one year.|
|Short-Term Rating||An opinion of an issuer’s ability to meet all financial obligations over the upcoming 12 month period, including interest payments and debt redemptions.|
|Tier 1 Capital||Primary capital consists of issued ordinary share capital, hybrid debt capital, perpetual preference share capital, retained earnings and reserves. This amount is then reduced by the portion of capital that is allocated to trading activities and other regulatory deductions.|
For a glossary of terms please click here
GCR accords an initial rating of BB(ZW) to Untu Capital Limited; Outlook Positive.