Announcements

GCR affirms Finbond Group Limited’s rating of BBB-(ZA); Outlook Stable.

Johannesburg, 29 October 2015 — Global Credit Ratings has affirmed the national scale ratings assigned to Finbond Group Limited of BBB-(ZA) and A3(ZA) in the long term and short term respectively; with the outlook accorded as Stable. Furthermore, Global Credit Ratings has affirmed the international scale rating assigned to Finbond Group Limited of BB; with the outlook accorded as Stable.

SUMMARY RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit ratings to Finbond Group Limited (“Finbond”, “the group”) based on the following key criteria:

The ratings of Finbond reflect its growing reputation as a leading mutual bank and short-term credit provider in South Africa. Finbond offers short and medium-term unsecured loans, insurance and savings products, and (since F15) transactional banking and mortgage finance products, through its 321 branches.

Adequate capital, conservative credit/risk management, and improving profitability and earnings diversification (despite regulatory risk) support the ratings, which exclude the prospect of systemic support, given its low likelihood. The rating outlooks consider Finbond’s prospects/strategic direction, within the context of challenging and uncertain economic and regulatory environments.

High liquidity levels (42.3% of assets at FYE15) and adequate capitalisation (Finbond Mutual Bank’s capital adequacy ratio was 35.1% at FYE15) support the group’s moderate credit appetite. The loan/deposit ratio was maintained at c.31% at FYE15.

Asset quality metrics broadly improved, despite the negative market trends. As c.90% of loans issued are short-term, traditional asset quality measures may overstate bad debt experience. Gross/net impairment ratios (impairments being defined as instalments in arrears) improved to 19.1%/11.5% at 1H F16 (FYE14: 21.2%/14.1%). However, net impairments vs. instalments due (management’s key asset quality measure) rose from 6.3% (FYE14) to 7.3% (1H F16). Over the same period, collection rates remained strong, and loan rejection rates as well as arrears levels/roll-rates were stable. Provisioning appeared adequate, but close monitoring is required given the challenging operating conditions.

In F15, operating income rose by 59.2% to R375.9m (net income – 37.9% to R50.9m). Despite 47.5% cost growth in F15 (driven by the group’s investment in infrastructure and internal controls) the cost/income ratio declined to 64.5% (F14: 69.6%). Of concern, impairment costs grew 141.4% in F15 and by 2.0x in 1H F16.

A sustained improvement in business profile (particularly scale and earnings diversification), as well as asset quality, capital and profitability, would be positively considered. A significant deterioration in Finbond’s asset quality, long term earnings, funding and liquidity profiles, as well as in its capital ratios, could lead to negative rating action.

NATIONAL SCALE RATINGS HISTORY   INTERNATIONAL SCALE RATING HISTORY
     
Initial rating (October 2011)   Initial rating (October 2013)
Long term: BB(ZA)   Long term: BB-
Outlook: Stable   Outlook: Stable
     
Last rating (October 2014)   Last rating (October 2014)
Long term: BBB-(ZA); Short term: A3(ZA)   Long term: BB
Outlook: Stable   Outlook: Stable

ANALYTICAL CONTACTS

Primary Analyst
Kurt Boere
Credit Analyst
(011) 784-1771
boere@globalratings.net
 
Committee Chairperson
Omega Collocott
Sector Head: Financial Institution Ratings
(011) 784-1771
omegac@globalratings.net

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Global Criteria for Rating Banks and Other Financial Institutions, updated March 2015

Finbond rating reports (2011-14)

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; c.) such rating was 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.

Finbond Group 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 ratings have been disclosed to Finbond Group Limited with no contestation of the rating.

The information received from Finbond Group Limited and other reliable third parties to accord the credit ratings included:

  • Audited financial results of Finbond Group Limited to 28 February 2015 (plus four years of comparative numbers);
  • Interim financial results of Finbond Group Limited to 31 August 2015;
  • Latest internal and/or external audit reports to management;
  • A breakdown of facilities available and related counterparties;
  • Reserving methodologies and capital management policy;
  • Industry comparative data and regulatory framework; and
  • Corporate governance and enterprise risk frameworks.

The ratings above were solicited by, or on behalf of, Finbond Group Limited, 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

Arrears An overdue debt, liability or obligation. An account is said to be ‘in arrears’ if one or more payments have been missed in transactions where regular payments are contractually required.
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.
Audit Report An audit report is a written opinion of an auditor (attesting to the financial statements’ fairness and compliance with generally accepted accounting principles).
Bad Debt A bad debt is an amount owed by a debtor that is unlikely to be paid due, for example, to a company going into liquidation. There are various technical definitions of what constitutes a bad debt, depending on accounting conventions, regulatory treatment and the individual entity’s own provisioning and write-off policies.
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.
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.
Corporate Governance Corporate governance broadly refers to the mechanisms, processes and relations by which corporations are controlled and directed, and is used to ensure the effectiveness, accountability and transparency of an entity to its stakeholders.
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.
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.
Default Failure to meet the payment obligation of either interest or principal on a debt or bond. Technically, a borrower does not default, the initiative comes from the lender who declares that the borrower is in default.
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.
Financial Institution An entity that focuses on dealing with financial transactions, such as investments, loans and deposits.
Financial Statements Presentation of financial data including balance sheets, income statements and statements of cash flow, or any supporting statement that is intended to communicate an entity’s financial position at a point in time.
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.
Income Statement A summary of all the expenditure and income of a company over a set period.
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 ISRs relate to either foreign currency or local currency commitments, assessing the capacity of an issuer to meet these commitments using a globally applicable (and therefore internationally comparable) scale.
Liabilities All financial claims, debts or potential losses incurred by an individual or an organisation.
Liquidation Liquidation is the process by which a company is wound up and its assets distributed. It can be either compulsory or voluntary. It can also refer to the selling of securities or the closing out of a long or short market position.
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.
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.
Off Balance Sheet Off balance sheet items are assets or liabilities that are not shown on a company’s balance sheet. They are usually referred to in the notes to a company’s accounts. 
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.
Principal The total amount borrowed or lent, e.g. the face value of a bond, excluding interest.
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).
REPO In a REPO one party sells assets or securities to another and agrees to repurchase them later at a set price on a specified date.
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.
Secured Loan A loan which is backed by a pledging of real or personal property (collateral) by the borrower to the lender. Unlike unsecured loans, which are backed by a promise by the borrower that he will repay the loan, in case of a secured loan, the lender can initiate legal action against the borrower to reclaim and sell the collateral (pledged property).
Securities Various instruments used in the capital market to raise funds.
Security An asset deposited or pledged as a guarantee of the fulfilment of an undertaking or the repayment of a loan, to be forfeited in case of default.
Shareholder An individual, entity or financial institution that holds shares or stock in an organisation or company.
Short Term Current; ordinarily less than one year.
Write-off The total reduction in the value of an asset.

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

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