Johannesburg, 22 April 2015 – Global Credit Ratings has today affirmed the national scale ratings assigned to IEMAS Financial Services (Co-operative) Limited of A-(ZA) and A2(ZA) in the long term and short term respectively; with the outlook accorded as Negative. Furthermore, Global Credit Ratings has affirmed the international scale rating assigned to IEMAS Financial Services (Co-operative) Limited of BB+; with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to IEMAS Financial Services (Co-operative) Limited (“Iemas” and/or “the co-operative”) based on the following key criteria:
The accorded ratings reflect Iemas’ established lending franchise, operating within its traditional business of consumer credit (and to a lesser extent insurance and card products) for its members at large established institutions through payroll deduction schemes. The profitable bottom line, appropriate risk management systems and adequate capitalisation, were also factored into the ratings, which exclude the prospect of state support. Capital and reserves grew by 16.0% (FYE13: 16.2%) to R1.2bn at FYE14 through retention of residual earnings. As a result, the capital/assets ratio increased to 20.6% from 19.5% at FYE13. The co-operative reported a gearing (debt/equity) ratio of 197.6% at FYE14 (FYE13: 210.4%), which remained well within the 300% gearing ratio covenant stipulated by lenders (banks and capital markets).
However, portfolio quality weakened during F14, due to consumer affordability constraints and over indebtedness, rising interest rates and a loan portfolio skewed towards the mining and metal industries which suffered protracted industrial action in 2014. Arrears more than doubled to R386.6m at FYE14 on the back of retrenchments, resignations, rationalisations and shorter work weeks. Consequently, the gross default ratio climbed to 6.3% at FYE14 (FYE13: 2.9%). Management has since taken steps to improve asset quality. This includes enhanced collection and recovery efforts, an expanded network of repossession agents and auction houses, tighter exposure limits and firmer affordability requirements. Arrears coverage by provisions amounted to 24.8% at FYE14 (F13: 42.1%), translating into a higher net defaults/capital ratio of 21.0% (FYE13: 7.4%), pre-collateral. Cognisance is taken of the large amount of collateral held against arrears, with the bulk of the loan portfolio in the form of vehicle finance and pension backed loans. However, the co-operative remains vulnerable to collateral valuation changes, particularly given lacklustre economic growth and potentially rising interest rates. Unsecured loans constituted c.18.8% of the book at FYE14.
Despite a rise in loan impairment charges and slower loan growth, pre-tax profit grew by 20.9% (F13: 11.6%) to R199.2m in F14, supported by significant growth in insurance premiums and upward adjustments in the prime lending rates. The ability to service debt remained satisfactory with the co-operative posting an interest coverage ratio of 2.5x in F14 (F13: 2.5x) (covenant minimum 1.5x). Overall, ROaA decreased slightly to 4.5% (F13: 4.7%), while the ROaE declined to 23.6% (F13: 25.3%).
A positive earnings trend while maintaining sound credit protection factors, as well as further progress in broadening the funding base and portfolio collections track record (both continuing and arrears loan book), will be considered positively. Conversely, a further deterioration in Iemas’ asset quality, long term earnings, funding and liquidity profile as well as in capital ratios (on the back of a weak economic outlook and dysfunctional labour relations environment) could lead to negative rating action.
|NATIONAL SCALE RATING HISTORY||INTERNATIONAL SCALE RATING HISTORY|
|Initial/Last rating (July 2014)||Initial/Last rating (July 2014)|
|Long term: A-(ZA); Short term: A2(ZA)||Long term: BB+|
|Outlook: Stable||Outlook: Stable|
Senior Credit Analyst
Sector Head: Financial Institution Ratings
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2015
Global Criteria for Rating Finance and Leasing Companies, updated March 2015
South Africa Bank Bulletin (2014)
Iemas Rating Report (2014)
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.
The ratings above were solicited by, or on behalf of, IEMAS Financial Services (Co-operative) Limited, and therefore, GCR has been compensated for the provision of the ratings.
IEMAS Financial Services (Co-operative) 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 IEMAS Financial Services (Co-operative) Limited with no contestation of the rating.
The information received from IEMAS Financial Services (Co-operative) Limited and other reliable third parties to accord the credit rating included the 31 August 2014 audited annual financial statements (plus four years of comparative numbers), latest internal and/or external management reports, 28 February 2015 management accounts, corporate governance and enterprise risk framework, reserving methodologies, capital management policy, industry comparative data and regulatory framework, and a breakdown of facilities available and related counterparties.
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 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.|
|Capital||The sum of money that is invested to generate proceeds.|
|Collateral||Asset provided to a creditor as security for a loan.|
|Covenant||A provision that is indicative of performance. Covenants are either positive or negative. Positive covenants are activities that the borrower commits to, typically in its normal course of business. Negative covenants are certain limits and restrictions on the borrowers’ activities.|
|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.|
|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.|
|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. For a company, its exposure may relate to a particular product class or customer grouping. Exposure may also arise from an overreliance on one source of funding.|
|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.|
|Franchise||Business or banking franchise; a bank’s business.|
|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, 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 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.|
|Leverage||With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.|
|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.|
|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.|
|Provision||The amount set aside or deducted from operating income to cover expected or identified loan losses.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|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).|
|Short Term||Current; ordinarily less than one year.|
GCR affirms IEMAS Financial Services (Co-operative) Limited’s rating of A-(ZA); Outlook Negative