Lagos, 29 January 2019 — Global Credit Ratings has affirmed LAPO Microfinance Bank Limited’s (“LAPO Mfb” or “the bank”) public, national scale ratings of BBB+(NG) and A2(NG), in the long and short term respectively; with the outlook accorded as Stable. The ratings are valid until September 2019.
Global Credit Ratings (“GCR”) has accorded the above credit ratings based on the following key criteria:
The accorded ratings reflect LAPO Mfb’s competitive position as one of the dominant players in the Nigeria microfinance banking space, strong capitalisation, stable funding and adequate liquidity, as well as weakened risk position.
LAPO Mfb has sustained strong capital growth in the five years to FY17, supported by good internal capital generation and capital raising. At N16.1bn, capitalisation relative to risk level at FY17 is considered satisfactory, translating to a risk weighted capital adequacy ratio of 28% (well above the 10% statutory minimum requirement) and equating to 3.2x the new minimum capital requirement for its license category respectively.
LAPO Mfb’s profitability curve trended downward in FY17, having maintained an upward slope in the preceding five years. Net profit before tax (“NPBT”) was down at N5.7bn, representing a year-on-year 14.4% decline. Both interest and non-interest income ended at 73.6% and 92.5% respectively of budget at 1H FY18, this attributed to the extension of the Bank Verification Number requirement to microfinance banks by Central Bank of Nigeria, which slowed down banking activity across the subsector for most part of the period. However, operating expenses and impairment charge were closer to budget at annualised 90.3% and 89.7% respectively, suppressing performance at the pre-tax level to barely annualised 12.5%.
Pressure on asset quality intensified in FY17, with LAPO Mfb’s non-performing loans (“NPL”) ratio (post write-offs totalling N390.8m) escalating to 8.5% (FY16: 6.2%). However, the risk of capital erosion appears minimal based on the low net NPL/capital ratio of 3.9% at the balance sheet date, while the arrears coverage ratio of 86.5% at FY17 is considered satisfactory.
Funding and liquidity are good and one of the key factors supporting the rating. Stable funding in the form of equity and member deposits lessens the risk of this institution failing. Liquidity is adequate based on the contractual maturity profile of its assets and liabilities. Assets are staggered to match maturity of labilities, resulting in positive liquidity gaps across all maturity buckets.
A satisfactory improvement in the bank’s asset quality position and financial performance could trigger a positive rating action. A negative rating action may follow further pressure on asset quality and profitability.
NATIONAL SCALE RATINGS HISTORY
Initial/last rating (July 2017)
Long term: BBB+(NG)
Short term: A2(NG)
Primary Analyst Committee Chairperson
Julius Adekeye Dave King
+23 41 904-9462-3 email@example.com
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Bank and Other Financial Institutions, updated March 2017
Global Criteria for Rating Microfinance Institutions, updated March 2017
Glossary of Terms/ Ratios (February 2016)
RATING LIMITATIONS AND DISCLAIMERS
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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 were solicited by, or on behalf of, LAPO Microfinance Bank Limited, and therefore, GCR has been compensated for the provision of the ratings.
LAPO Microfinance Bank Limited participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of info received was considered adequate and has been independently verified where possible.
The credit ratings above were disclosed to LAPO Microfinance Bank Limited with no contestation of/changes to the ratings.
The information received from LAPO Microfinance Bank Limited and other reliable third parties to accord the rating included the audited annual financial statements of LAPO Microfinance Bank Limited for five years, up to 31 December 2017, the unaudited management accounts for six months (up to June 2018), and other detailed information related to the bank’s operations.