Johannesburg, 12 April 2016 – 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 long-term local currency 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 rating(s) to IEMAS Financial Services (Co-operative) Limited (“Iemas”, “the co-operative”) based on the following key criteria:
The ratings of Iemas reflect its long history and established lending platform, operating within its traditional business of consumer credit (including ancillary insurance and card products) for its members at large established institutions (employer groups) through contractual relationships and payroll based collection mechanisms. Iemas’ resilient operating performance amidst rising asset quality stress, 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 14.6% (FYE14: 16.0%) to R1.3bn at FYE15 driven by retained earnings. Consequently, the capital/assets ratio increased to a review period high of 24.3% at FYE15 (FYE14: 20.6%). The co-operative reported a gearing (debt/equity) ratio of 157.8% at FYE15 (FYE14: 197.6%), which remained well within the 300% gearing ratio covenant stipulated by lenders (banks and capital markets).
Asset quality remains under pressure due to consumer affordability constraints and over-indebtedness, negative trends in the operating environment (eg, rising interest rate cycle), industrial action and business restructuring (ie, retrenchments, shorter work weeks and resignations) at employer groups. The co-operative has significant exposures to the mining and metal industries (52.7% of the loan portfolio at FYE15). These sectors have suffered from protracted industrial action, job losses and downsizing in recent years. In response, management has curtailed lending, tightened lending criteria, stepped up collection and recovery efforts and targeted new lending to less susceptible sectors.
Gross non-performing loans (“NPLs”) grew by a marginal 0.6% to FYE15 from a sharp growth of 135.9% to FYE14. The slowdown in NPL formation was on the back of write-offs, loan restructuring and enhanced monitoring and recovery efforts. Notwithstanding this, the gross NPL ratio increased to 6.6% at FYE15 (FYE14: 6.3%) on the back of a shrinking (by 2.1% at FYE15) loan portfolio. Arrears coverage by specific provisions increased to 20.9% at FYE15 (FYE14: 17.1%), pre-collateral. Unreserved impaired loans (net NPLs) declined to 16.8% of capital at FYE15 (FYE14: 21.0%). Cognisance is taken of the large amount of collateral held against NPLs, with the bulk of the loans in the form of vehicle finance (55.2%) and pension backed loans (26.1%), although vulnerable to collateral valuation changes. Unsecured loans constituted 18.7% of the book at FYE15 (FYE14: 19.4%).
Iemas reported a marginal (2.1%) pre-tax profit increase in F15 (F14: 20.9% increase), mainly due to larger credit losses and subdued net interest income on the back of curtailed loan growth. The ability to service debt remained satisfactory with the co-operative posting an interest coverage ratio of 2.4x in F15 (F14: 2.5x) against a covenant minimum of 1.5x. Overall, ROaE decreased to 21.3% (F14: 23.6%), while the ROaA remained flat at 4.5%.
An upgrade would be premised on a significant increase in operational scale accompanied by healthy and stable financial metrics through the economic cycle, strong capital and liquidity metrics, and the maintenance of sound asset quality driven by low credit losses and sound underwriting. Continued negative trends in asset quality and profitability, and a loss of scale in the business, could lead to downward ratings migration.
|NATIONAL SCALE RATINGS HISTORY||INTERNATIONAL SCALE RATING HISTORY|
|Initial rating (July 2014)||Initial rating (July 2014)|
|Long-term: A-(ZA); Short-term: A2(ZA)||Long-term: BB+(ZA);|
|Outlook: Stable||Outlook: Stable|
|Last rating (December 2015)||Last rating (December 2015)|
|Long-term: A-(ZA); Short-term: A2(ZA)||Long term: BB(ZA);|
|Outlook: Negative||Outlook: Stable|
|Primary Analyst||Committee Chairperson|
|Jennifer Mwerenga||Omega Collocott|
|Senior Analyst||Sector Head: Financial Institution Ratings|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2016
Global Criteria for Rating Finance and Leasing Companies, updated March 2016
Iemas Rating Reports (2014-15)
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.
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 ratings have 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 ratings included:
- Audited financial results of IEMAS Financial Services (Co-operative) Limited to 31 August 2015 (plus four years of comparative numbers);
- Interim financial results of IEMAS Financial Services (Co-operative) Limited to 29 February 2016;
- 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, IEMAS Financial Services (Co-operative) 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 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.|
|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.|
|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.|
|Gearing||With regard to corporate analysis, gearing (or leverage) refers to the extent to which a company is funded by debt.|
|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 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.|
|Non-Performing Loan||When a borrower is overdue, typically 90+ days in arrears or as defined by the lender, or in the transaction documents.|
|NPL Ratio||The ratio of non-performing loans and advances to total gross loans and advances, expressed as a percentage.|
|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.|
|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.|
|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.|
|Retained Earnings||Earnings not paid out as dividends by a company. Retained earnings are typically reinvested back into the business and are an important component of shareholders’ equity.|
|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.|
|Securities||Various instruments used in the capital market to raise funds.|
|Shareholder||An individual, entity or financial institution that holds shares or stock in an organisation or company.|
|Write-off||The total reduction in the value of an asset.|
GCR affirms IEMAS Financial Services (Co-operative) Limited’s rating of A-(ZA); Outlook Negative.