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)|
|Last rating (May 2015)|
|Long term: BB(GH); Short term: B(GH)|
|Sector Head: Financial Institution Ratings|
|Senior Credit Analyst|
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.