Johannesburg, 10 Feb 2014 — Global Credit Ratings has affirmed the long term national scale and affirmed the short term national scale issuer ratings assigned to Credit Direct Limited of BBB-(NG) and A3(NG) respectively; with the ratings placed on Rating Watch. The rating(s) are valid until 6/2014.
Global Credit Ratings has accorded the above credit rating(s) on Credit Direct Limited based on the following key criteria:
Credit Direct Limited (“CDL” or “the company”) is a member of the First City Monument Bank (“FCMB”) Group, a well known brand in the industry. Accordingly, the level of demonstrated support from its parent serves to underpin to the company’s ratings; simply put, CDL’s ratings received a two notch uplift above its standalone credit profile, driven largely by the moderately strong operational and strategic ties between the company and its majority shareholder, and ultimate parent, FCMB Plc (rated ‘BBB+’ and ‘A3’, with a Stable Outlook by GCR).
During the review period, the company was granted a licence to operate as a finance house. The positives here are that CDL will hereafter be operating in a regulated environment and subject to stricter operating rules. Conversely, the legal and operational separation of CDL from its parent, does increase its risk profile. That, combined with the extremely low maintenance liquidity level, and the fact that business growth has mostly been on the back of debt rather than generated equity, support the need for closer observation by GCR, and the rating watch status.
Following the issue of new ordinary shares during the year, CDL’s core capital increased to N500m. In turn, total shareholders’ funds were up 49% to N2.2bn, mainly on account of retained earnings and an increase in general reserves. It should be noted though, that while CDL has been known for its reliance on its parent in the past, efforts are underway to broaden/diversify its funding.
Although the company posted a notable reduction in overall arrears, several items stand out when considering the data: (i) with loans being collected via payroll deduction, the past level of arrears indicates some inefficiency in the process; (ii) despite the clean-up, the transition of impaired loans into the late stage arrears buckets did not slow (up 9.1%); and (iii) write offs for the period came in at 9% of arrears, while total impaired loans reduced by 40.3%. Management explained the difference as technical delays which were cleared, as well as prepayments.
Positive movement/s: The company’s ability to sustain and improve its profitability and asset quality positions, as well as the ability to raise funds through other sources.
Negative movement/s: A significant decline in asset quality or earnings (which could impair capital) may give rise to a rating action. Also, a sudden withdrawal of support from the parent company may bring about a similar action.
NATIONAL SCALE RATINGS HISTORY
Last/Initial Rating (Nov/2012)
Long term: BBB-(NG); Short term: A3(NG)
+23 41 462 2545
Sector Head: Financial Institution Ratings
+27 11 784 1771
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Financial Institution Criteria (updated 2013)
Microfinance Criteria (updated 2013)
Previous Rating Reports (2012)
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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; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
Credit Direct Limited participated in the rating process via face-to-face 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 rating/s has been disclosed to and contested by Credit Direct Limited, though the accorded rating symbols were not amended.
The information received from Credit Direct Limited and other reliable third parties to accord the credit rating included the latest audited annual financial statements for 2012 (plus three years of comparative numbers), latest internal and/or external report to management, full year detailed budgeted financial statements for 2013 and management accounts as at September 2013. In addition, information specific to the rated entity and/or industry was also received.
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.
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