Announcements Financial Institutions Rating Alerts

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

Johannesburg, 12 December 2018 – 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. At the same time, Global Credit Ratings has affirmed the long-term international scale local currency rating assigned to Finbond Group Limited of B+; with the outlook accorded as Stable.

SUMMARY RATING RATIONALE

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

The ratings on Finbond reflect its monoline market segment, good geographic diversification, strong capitalisation supported by good internal capital generation, weak risk position, stable funding and robust liquidity.

The company profile is a negative rating factor balancing the predominant focus of unsecured lending, small market share, good geographic diversity relative to peers. While the secured lending product is being rundown, the monoline strategy of unsecured lending exposes the group to increased risk from credit events and regulation just to mention a few. On the other hand, the geographical expansion of the group into North America has strengthened its competitive position. In addition, better earnings diversification is also viewed positively, with c.63% of the group’s earnings currently generated by international businesses, with the expectation to grow this to c. 70-80% in 3 to 5 years.

Finbond’s capitalisation is strong, and is one of the key factors supporting its rating. The equity/total assets ratio registered within strong range (48.2% at 1H19). Conversion of shareholder loans (R365m) to Tier 1 equity during 1H19 has also helped capitalisation which we view to be stronger as a result. The group’s banking subsidiary Finbond Mutual Bank had a capital adequacy ratio of 34.8%, reflecting a good headroom above the regulatory minimum. Over the next two years, we expect capitalisation to range around 35-40%, supported by internal capital generation which in part benefits from the favourable profiles of acquired short term lenders as required by the group’s investment criteria. But also, annualised margins are high given the short term nature of assets while financing is long term.

The group’s funding is stable, which lessens the risk of this entity defaulting. Equity, term deposits, and shareholder loans are the major funding sources. Liquidity is robust, supported by high collections on short term loans averaging 94% during the year. Basel III liquidity coverage ratio of 168% vs regulatory minimum of 90% supports this liquidity assessment.

Risk position is weak, demonstrated by the high write offs. Adoption of IFRS 9 resulted in the group changing the write off policy from a delinquency approach (1AS 39) to a staging approach based on expected recoveries. Because of Finbond’s quick write off cycle under IAS 39, off balance sheet bad debts were brought back on balance sheet as the group still expect collections on these accounts. This escalates the arrears ratio to 66.2%, however with no material impact on earnings expected given a loan loss reserve coverage of 85.1%. In addition, the group recovers on average 28.9% of bad debts written off within the same year. Collections from the USA portfolio continued to be higher relative to South Africa, although the group’s average declined to 83% at 1H19.

The upside rating movement is sensitive to increased contribution to earnings by the international business, sustained capital and liquidity positions, diversification of business to more of transactional banking, and material improvement in asset quality. While downside pressure may stem from capitalisation reducing materially, worsening asset quality and reserving, coupled with unstable funding structure.

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 2017)   Last rating (June 2018)
Long-term: BBB(ZA); Short-term: A3(ZA)   Long term: B+
Outlook: Stable   Outlook: Stable

ANALYTICAL CONTACTS

     
Primary Analyst   Committee Chairperson
Simbarake Chimutanda   Matthew Pirnie
Credit Analyst   Sector Head: Financial Institution Ratings
(011) 784-1771   (011) 784-1771
simbarakec@globalratings.net   matthewp@globalratings.net

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Global Criteria for Rating Banks and Other Financial Institutions, updated March 2017

Finbond Group Limited rating reports (2011-17)

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; c.) such rating was an independent evaluation of the risks and merits of the rated entity; 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 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.

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

  • Audited financial results at 29 February 2018 (and four years of comparative numbers);
  • Latest internal and/or external audit report to management;
  • A breakdown of facilities available and related counterparties;
  • Corporate governance and enterprise risk framework; and
  • Industry comparative data and regulatory framework.

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

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.
Audit Report A written opinion of an auditor (attesting to the financial statements’ fairness and compliance with generally accepted accounting principles).
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.
Collateral Asset provided to a creditor as security for a loan.
Corporate Governance 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.
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.
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.
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.
Liabilities All financial claims, debts or potential losses incurred by an individual or an organisation.
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 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.
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.
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.
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.
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.
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 then reduced by the portion of capital that is allocated to trading activities and other regulatory deductions.

For a detailed glossary of terms please click here

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



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.

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