Johannesburg, 27 September 2021 – GCR Ratings (“GCR”) has affirmed Letshego Bank Namibia Limited’s national scale long and short-term issuer ratings of A(NA) and A1(NA) respectively, with a Stable Outlook.
|Rated Entity||Rating class||Rating scale||Rating||Outlook/Watch|
|Letshego Bank Namibia Limited||Long Term issuer||National||A(NA)||Stable Outlook|
|Short Term issuer||National||A1(NA)|
The ratings on Letshego Bank Namibia Limited (“LBN”, “the bank”) reflect the credit profile of Letshego Holdings Namibia Limited (“LHN”, “the Group”). GCR believes the bank is a core part of the Letshego Namibia group. While LBN is not the largest contributor to Group assets and revenues (less than 50%), relative to Letshego Micro Financial Services (Namibia) (Pty) Limited (“LMFSN”), the Group benefits from the banking licence and the avenues that it opens. However, in the event the level of importance reduces, the ratings may be de-linked from the group Anchor Credit Evaluation (“ACE”)/ group credit profile.
The ratings are restrained by the weaker business profile of the banking group characterised by its small size, moderately high cost of funding and relative lack of diversity in comparison to Namibian large domestic banks. The ratings also reflect good levels of capitalisation, improvements in the risk profile, offset by a concentrated wholesale funding structure and weaker liquidity. Furthermore, the ratings benefit from Letshego Holdings Limited (“LHL”) parental support.
The Group predominantly focusses on providing loans on deduction at source (“DAS”) to government employees and as such, has a niche market focus. However, the strengths within its chosen niche are partly offset by significantly smaller and less diverse operations (by product and business line) than the large domestic banks operating in Namibia. The domestic financial sector is dominated by four large and heterogeneous financial conglomerates, most with close ownership and funding links to South Africa. Consequently, LBN’s competitive position is weak, characterised by a very small market share by customer deposits. LBN is leveraging on synergies with its sister company LMFSN to facilitate migration of DAS clients to banking customers in addition to a banking customer acquisition drive. Whilst diversification efforts are strategically appropriate, it is also expected to be challenging, given high barriers to entry and competition with the larger more established commercial banks. Successful on-boarding of LMFSN customers into banking customers may improve market share somewhat and may lower cost of funding over the long term as customer deposits increase.
Positively, capital and earnings remain significantly positive to the ratings. Capitalisation is strong, supported by a very high GCR capital ratio which we expect to be sustained above 80% over the next 12 to 18 months. Earnings are supportive of strong capitalisation, although over the next 12 to 18 months profitability will largely depend on how the Group manages funding new / additional product projects. While reserving is considered low in relation to rated peer banks, the Group enjoys insurance post default recovery cover with strong insurers and inherently collateralised loan book.
While the credit losses are broadly in line with top tier domestic banks, product (DAS) and sectorial (public sector) concentration risk is very high. Furthermore, the group is exposed to high transformational and strategic risk if the Group fails to renew the deduction at source code. If the deduction at source code is not renewed and, the Group is required to use PSD-7 (non-preferential treatment of all payment instruments), revenues are likely to drop and additional (salary based) security materially lowered. In which case, non-performing loans (“NPLs”) and credit losses will likely increase. At the same time, increasing lending outside the core business may also introduce higher asset quality risk. As a mostly government DAS business, the Group was able to remain resilient to the worst effects of COVID-19. However, the Group was not immune to the sector wide challenges evidenced by an increase in credit losses to 1.3% in December 2020 (FY2019: 0.3%) before reducing marginally to 1.2% on 30 June 2021. We expect credit losses to align with industry averages, if not better due to the DAS product with a collection rate of c.98%. Product (DAS) and sectorial (public sector) concentration remains very high.
LHN’s funding is relatively concentrated and expensive in comparison to banking peers in Namibia. Cost of funding was moderately high, around 8.3% at 31 December 2020 because of high reliance on intercompany loans (73% of liability funding). The strategy to grow customer deposits and to reduce reliance on wholesale funds and capital may lower the cost of funds. Customer deposits improved to 19% of the funding base on 30 June 2021 (FY2020: 11%). However, customer deposit concentration is very high, with the top ten (10) contributing over 90% to customer deposits on 30 June 2021. The combined funding and liquidity score was moderated (reflecting lower stand-alone liquidity) with a commensurate improvement reflected in parental support. The Group is largely funded by borrowings contributing 81% to total liability funding through intercompany loans (c.39%), two banking facilities and a bond programme. Further reliance is placed on LHL for liquidity management in the form of an off-balance sheet facility. Liquidity is adequate, due to the significant facilities provided by the ultimate parent. The Group managed down on-balance sheet liquid assets significantly in the last year, in favour of servicing facilities to avoid negative carry. At 30 June 2021, liquid assets (including unutilised committed facilities) covered 0.6x of borrowings and 0.45x of the funding base. Given the primarily long-term nature/ maturity of the funding base, behavioural short-term refinancing risk is considered moderately low.
The issuer ratings benefit from parental support. LHN is wholly owned by LHL which is headquartered and listed in Botswana, delivering financial solutions to populations across 11 Sub-Saharan markets. Though not a material asset or revenue contributor, there is evidence of support from and assimilation with the parent. We believe LHL has the capacity to support the Group based on its sound financial profile and good geographic diversification. Parental support is moderated by the requirement that LBN increase its local ownership to 45% by 31 December 2023. In that instance, this may result in lower parental support from LHL.
The outlook is stable, balancing the strain of the operating environment with a sound financial profile. We expect a strong GCR capital ratio for the next two years supporting its very solid position, with solid internal capital generation. We anticipate the cost of risk to return to levels below 1% despite elevated asset quality risk and product concentration risk. We also factor in adequate liquidity supported by renewable facilities, the bond programme and committed shareholder support.
We could raise the ratings if the regulator renews the deduction code in the short to medium term, if LHN raises and maintains a more diversified long-term funding structure and if over the longer-term there is an improvement in the business diversification without a deterioration in asset quality. A downgrade could be caused by higher than anticipated credit losses or a weaker funding and liquidity profile. We could de-link or lower the ratings on LBN if we view the group importance to have decreased.
|Primary analyst||Vimbai Mandebvu||Financial Institutions Analyst|
|Johannesburg, ZA||VimbaiM@GCRratings.com||+27 11 784 1771|
|Committee chair||Matthew Pirnie||Group Head of Ratings|
|Johannesburg, ZA||MatthewP@GCRratings.com||+27 11 784 1771|
Related Criteria and Research
|Criteria for the GCR Ratings Framework, May 2019|
|Criteria for Rating Financial Institutions, May 2019|
|GCR Ratings Scales, Symbols & Definitions, May 2019|
|GCR Country Risk Scores, August 2021|
|GCR Financial Institutions Sector Risk Score, September 2021|
Letshego Bank Namibia Limited
|Rating class||Review||Rating scale||Rating||Outlook/Watch||Date|
|Long Term issuer||Initial/last||National||A(NA)||Stable Outlook||September 2020|
|Short Term issuer||Initial/last||National||A1(NA)||September 2020|
Risk Score Summary
|Rating Components & Factors||Risk Scores|
|Country risk score||5.50|
|Sector risk score||5.00|
|Management and governance||0.00|
|Capital and Leverage||4.00|
|Funding and Liquidity||(0.75)|
|Capital||The sum of money that is invested to generate proceeds.|
|Cash||Funds that can be readily spent or used to meet current 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.|
|Diversification||Spreading risk by constructing a portfolio that contains different exposures 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.|
|Income||Money received, especially on a regular basis, for work or through investments.|
|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.|
|Issuer||The party indebted or the person making repayments for its borrowings.|
|Leverage||With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.|
|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 Rating||See GCR Rating Scales, Symbols and Definitions.|
|Margin||A term whose meaning depends on the context. In the widest sense, it means the difference between two values.|
|Market||An assessment of the property value, with the value being compared to similar properties in the area.|
|Maturity||The length of time between the issue of a bond or other security and the date on which it becomes payable in full.|
|Rating Outlook||See GCR Rating Scales, Symbols and Definitions.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Short Term Rating||See GCR Rating Scales, Symbols and Definitions.|
|Short Term||Current; ordinarily less than one year.|
SALIENT POINTS OF ACCORDED RATING
GCR affirms that a.) no part of the rating process was influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The credit ratings have been disclosed to Letshego Bank Namibia Limited. The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings.
Letshego Bank Namibia Limited participated in the rating process via video conference management meetings, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The information received from Letshego Bank Namibia Limited and other reliable third parties to accord the credit ratings included:
- The audited financial results to 31 December 2020;
- Unaudited interim results as at 30 June 2021;
- Asset liability management information at 30 June 2021;
- Breakdown of facilities; and
- Other related documents.