Announcements

GCR affirms AFB (Ghana) Plc’s long term national scale rating of BB(GH); Outlook Stable.

Johannesburg, 6 April 2016—Global Credit Ratings has affirmed the national scale ratings accorded 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 April 2017.

AFB (Ghana) Plc (“AFB Ghana”, “the company”) operates as a non-bank financial institution licenced by the Bank of Ghana, providing unsecured consumer finance to the un/under-banked market (ie, small/micro businesses and individuals) through its 22 branches. The company’s lending focus has traditionally been on payroll-based collections, but in F15 it launched a direct loan product, collected via debit order (which comprised 5.8% of the loan book at FYE15).

AFB Ghana is part of the group owned by Jumo World Limited (“Jumo World”), formerly AFB (Mauritius) Limited, which is focussed on the delivery of products and services with a financial inclusion bias into African markets with large un/under-banked populations, developed national payment systems, and strong penetration of mobile phone technology. AFB Ghana’s strategic priorities for 2016 include entrenchment of existing business lines (in particular its direct lending product), development of a mobile money transactional and loan offering in partnership with Jumo World and third party service providers, and the potential addition of pension backed lending and fixed term deposits to the product suite.

SUMMARY RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit rating(s) to AFB Ghana based on the following key criteria:

The ratings reflect the developing lending business, diminished currency risk, increased funding independence, and strong management team of AFB Ghana. The company is a wholly owned subsidiary of Jumo World, from which it receives significant capital, funding, strategic and systems support. During F15, the company increased its capitalisation and funding diversification, while largely eliminating structural currency mismatches, thereby improving financial stability. This was achieved by Jumo World exchanging intercompany loans in the amount of GHS23.5m (USD6.4m) for equity, satisfying AFB Ghana’s minimum regulatory capital requirement of GHS15m, and supporting capital adequacy and operational requirements.

In July 2015, AFB Ghana listed GHS58.6m through its medium term note (“MTN”) programme (GHS30.5m in new funds, the remainder by introduction). The rated, listed notes (issued after AFB Ghana converted to a public company) increased funding diversification. New funds were used to repay mezzanine and intercompany loans. Elimination of foreign currency funding (together with slowing GHS/USD depreciation) reduced foreign currency losses from GHS17.7m (F14) to GHS2.7m (F15).

However, the current debt structure is not without risk. MTNs of GHS30.4m mature in mid-2018, highlighting refinancing risk. Furthermore, interest rate risk is significant, highlighted by net interest margin compression from 42.5% to 34.2%, largely as a result of rising rates (and some loan term extension). Loans have fixed rates, while most funding is linked to floating 182-day Treasury bill rates. Rising rates could perpetuate margin compression, while falling rates may enhance profitability (particularly if combined with lower funding costs).

Advances growth was muted in F15, given collection challenges, which prompted tighter underwriting criteria. The gross non-performing loan (“NPL”) ratio rose to 10.2% at FYE15 (FYE14: 8.0%) mainly driven by conservative arrears classification in direct lending. Provision coverage remained above 100%, and average write-off ratios moderated slightly.

AFB Ghana’s F15 pre-tax profit of GHS0.2m (F14: pre-tax loss of GHS8.4m) was driven by reductions in currency risk and depreciation, acceptable collections and rising operating costs. However, the reversal of a tax credit in F15 resulted in an after-tax loss of GHS2.9m (F14: post-tax loss of GHS7.8m). F16 is expected to be a profitable year on both a pre- and post-tax basis. Going forward, cost control, targeted growth in payroll collections, improving collection levels on direct loans, containment of impairments within budgeted levels, and the profitable introduction of new products are expected to drive the bottom line.

While Ghana’s macroeconomic environment exhibits fiscal strain, high inflation, rising interest rates and a weak currency, financial sector trends support AFB Ghana’s business model. In 2015, banks reduced credit to households, while consumer credit demand is on the rise (given households’ desires for income smoothing). NPL data also highlights households’ relative resilience to economic challenges. While the company’s prospects appear positive, it remains exposed to environmental and operational risks.

Further increases in operational scale, earnings stability and funding diversification, as well as an enhanced collections track record, could result in positive ratings action. Funding and/or capital raising constraints, above expectation credit losses, and persistent negative profitability (possibly as the result of continuously tight monetary conditions in Ghana, combined with low economic growth) may result in a negative ratings trajectory.

NATIONAL SCALE RATINGS HISTORY    
     
Initial rating (May 2014)    
Long term: BB(GH); Short term: B(GH)    
Outlook: Stable    
     
Last rating (May 2015)    
Long term: BB(GH); Short term: B(GH)    
Outlook: Stable    

ANALYTICAL CONTACTS

Primary Analyst  
Omega Collocott  
Sector Head: Financial Institution Ratings  
(011) 784-1771  
omegac@globalratings.net  
   
Committee Chairperson  
Jennifer Mwerenga  
Senior Credit Analyst  
(011) 784-1771  
jennifer@globalratings.net  

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Global Master Criteria for Rating Banks and Other Financial Institutions, updated March 2016

Global Criteria for Rating Finance and Leasing Companies, updated March 2016

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 2015;
  • Four years of comparative numbers;
  • Budgeted financial statements for the year ended 31 December 2016;
  • Management accounts to 29 February 2016;
  • 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 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.
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.
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.
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.
Financial Institution An entity that focuses on dealing with financial transactions, such as investments, loans and deposits.
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.
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.
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.
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.
International Scale Rating LC International local currency (International LC) ratings measure the likelihood of repayment in the currency of the jurisdiction in which the issuer is domiciled. Therefore, the rating does not take into account the possibility that it will not be able to convert local currency into foreign currency or make transfers between sovereign jurisdictions.
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.
National Scale Rating 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.
Performing Loan A loan is said to be performing if the borrower is paying the interest on it on a timely basis.
Provision The amount set aside or deducted from operating income to cover expected or identified loan losses.
Regulatory Capital The total of primary, secondary and tertiary capital.
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.
Term Deposit A savings account held for a fixed term. Also called a time deposit. Generally, there are penalties for early withdrawal.

For a detailed glossary of terms utilised in this announcement please click here

GCR affirms AFB (Ghana) Plc’s long term national scale rating of BB(GH); Outlook Stable.

image_pdfPDF View

Leave a Reply



ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK:HTTP://GCRRATINGS.COM. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT WWW.GCRRATINGS.COM/RATING_INFORMATION. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR's CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THIS SITE.

CREDIT RATINGS ISSUED AND RESEARCH PUBLICATIONS PUBLISHED BY GCR, ARE GCR’S OPINIONS, AS AT THE DATE OF ISSUE OR PUBLICATION THEREOF, OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. GCR DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL AND/OR FINANCIAL OBLIGATIONS AS THEY BECOME DUE. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: FRAUD, MARKET LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND GCR’S OPINIONS INCLUDED IN GCR’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. CREDIT RATINGS AND GCR’S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND GCR’S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL OR HOLD PARTICULAR SECURITIES. NEITHER GCR’S CREDIT RATINGS, NOR ITS PUBLICATIONS, COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. GCR ISSUES ITS CREDIT RATINGS AND PUBLISHES GCR’S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING OR SALE.

Copyright 2019 GCR INFORMATION PUBLISHED BY GCR MAY NOT BE COPIED OR OTHERWISE REPRODUCED OR DISCLOSED, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT GCR’S PRIOR WRITTEN CONSENT. Credit ratings are solicited by, or on behalf of, the issuer of the instrument in respect of which the rating is issued, and GCR is compensated for the provision of these ratings. Information sources used to prepare the ratings are set out in each credit rating report and/or rating notification and include the following: parties involved in the ratings and public information. All information used to prepare the ratings is obtained by GCR from sources reasonably believed by it to be accurate and reliable. Although GCR will at all times use its best efforts and practices to ensure that the information it relies on is accurate at the time, GCR does not provide any warranty in respect of, nor is it otherwise responsible for, the accurateness of such information.GCR adopts all reasonable measures to ensure that the information it uses in assigning a credit rating is of sufficient quality and that such information is obtained from sources that GCR, acting reasonably, considers to be reliable, including, when appropriate, independent third-party sources. However, GCR cannot in every instance independently verify or validate information received in the rating process. Under no circumstances shall GCR have any liability to any person or entity for (a) any loss or damage suffered by such person or entity caused by, resulting from, or relating to, any error made by GCR, whether negligently (including gross negligence) or otherwise, or other circumstance or contingency outside the control of GCR or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits) suffered by such person or entity, as a result of the use of or inability to use any such information. The ratings, financial reporting analysis, projections, and other observations, if any, constituting part of the information contained in each credit rating report and/or rating notification are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. Each user of the information contained in each credit rating report and/or rating notification must make its own study and evaluation of each security it may consider purchasing, holding or selling. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY GCR IN ANY FORM OR MANNER WHATSOEVER.