Johannesburg, 31 October 2016 — 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 local currency 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:
Finbond, through its underlying businesses, the most significant being Finbond Mutual Bank (“FMB”), offers short- and medium-term unsecured loans, insurance and savings products, transactional banking, and mortgage finance products to individuals in South Africa. Post FYE16, Finbond raised a total of R1.08bn from shareholders and expanded its operations to the United States of America and Canada through the acquisition of 178 short-term lending branches operating in the Alternative Financial Services market.
The ratings of Finbond, an operating holding company (through which the group’s credit-linked insurance products are provided), reflect its growing local mutual banking and microfinance businesses, and international expansion. Evolving regulatory landscapes, characterised by amendments to existing regulations and the introduction of new requirements, as well as weak economic conditions (in South Africa especially) were also considered.
Robust credit/risk management, stable asset quality/performance and comfortable capital/liquidity levels support the ratings, which exclude the prospect of state support, given its low likelihood. The rating outlooks consider the group’s development and growth phase, within the context of challenging and uncertain economic and regulatory environments.
The group maintains adequate capitalisation relative to its level of credit risk. Finbond’s capital/assets ratio was 27.1% (FYE15: 25.6%), and FMB’s capital adequacy ratio was 35.8% (FYE15: 35.1%) at FYE16.
Fixed term deposits from customers, Finbond’s main source of funding, decreased by 1.5% (compared to loan growth of 17.2% in F16) as management sought to reduce the cost of surplus funds. As a result, the loan/deposit ratio increased to 35.9% (FYE15: 31.0%) at FYE16, and liquid assets as a percentage of total assets was a lower 25.7% (FYE15: 42.3%) at FYE16.
Finbond’s conservative lending practices and strict upfront credit scoring, as well as write-offs of R94.4m (F15: R78.2m), reduced the gross impairment ratio to 12.4% (FYE15: 19.4%) at FYE16. Provision coverage of arrears increased to 49.1% (FYE15: 43.7%). In F16, collection and rejection rates remained high. While most metrics highlighted asset quality improvement, operating environment challenges make a reversal of this trend in F17 a possibility in GCR’s opinion.
In F16, operating income rose by 24.6% to R468.3m and net income by 12.6% to R57.3m. The majority of profit was derived from Finbond’s small personal loans, microfinance initiation and service fees, and insurance commission revenue. Impairments increased by 18.6% (in line with loan growth), while the cost-to-income ratio remained unchanged at 64.5% in F16.
A sustained improvement in business profile (particularly scale and earnings diversification), as well as stable asset quality and capital metrics would be positively considered. A significant deterioration in Finbond’s asset quality, earnings, capital, funding and/or liquidity profiles, could lead to negative rating action.
|NATIONAL SCALE RATINGS HISTORY||INTERNATIONAL SCALE LC RATING HISTORY|
|Initial rating (October 2011)||Initial rating (October 2013)|
|Long term: BB(ZA)||Long term: BB-|
|Outlook: Stable||Outlook: Stable|
|Last rating (December 2015)||Last rating (December 2015)|
|Long term: BBB-(ZA); Short term: A3(ZA)||Long term: BB-|
|Outlook: Stable||Outlook: Stable|
|Senior Credit Analyst|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2016
Finbond rating reports (2011-15)
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 ratings.
The information received from Finbond Group Limited and other reliable third parties to accord the credit rating(s) included:
- Audited financial results of the group at 29 February 2016 (plus four years of comparative numbers);
- Corporate governance and enterprise risk framework;
- Reserving methodologies and capital management policy;
- Industry comparative data and regulatory framework; and
- A breakdown of facilities available and related counterparties.
The ratings above were solicited by, or on behalf of, Finbond Group Limited, and 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||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.|
|Basel||Basel Committee on Banking Supervision housed at the Bank for International Settlements.|
|Bond||A long-term debt instrument issued by either: a company, institution or the government to raise funds.|
|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.|
|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.|
|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.|
|Equity||Equity (or shareholders’ funds) is the holding or stake that shareholders have in a company.|
|Exposure||Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset.|
|Fixed Deposit||Where funds are deposited in a savings account for a pre-determined period of time.|
|Gearing||With regard to corporate analysis, gearing (or leverage) refers to the extent to which a company is funded by debt.|
|Impairment||Reduction in the value of an asset because the asset is no longer expected to generate the same benefits (periodically assessed).|
|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.|
|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.|
|Liquid Assets||Assets, generally of a short-term, that can be converted into cash.|
|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.|
|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.|
|Maturity||The length of time between the issue of a bond or other security and the date on which it becomes payable in full.|
|Net Interest Margin||Net interest income divided by average interest earning assets. Measures a bank’s margin after paying funding sources and how successful a bank’s interest-related operations are.|
|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.|
|Prepayment||Any unscheduled or early repayment of the principal of a mortgage/loan.|
|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 (ie, deviation from expected earnings/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.|
|Security||An asset deposited or pledged as a guarantee of the fulfilment of an undertaking/repayment of a loan, forfeited in case of default.|
|Settlement||Full repayment of an obligation.|
|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.|
|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.|
|Stock Exchange||A market with a trading-floor or a screen-based system where members buy and sell securities.|
|Tenor||The time from the value date until the expiry date of a financial instrument.|
|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 reduced by the portion of capital that is allocated to trading activities and other regulatory deductions.|
|Tier 2 Capital||Secondary capital is mainly made up of subordinated debt, portfolio impairment and 50% of any revaluation reserves and other specified regulatory deductions.|
For a detailed glossary of terms utilised in this announcement please click here
GCR affirms Finbond Group Limited’s rating of BBB-(ZA); Outlook Stable.