Johannesburg, 26 May 2021 – GCR Ratings (“GCR”) has affirmed Letshego Ghana Savings and Loans PLC’s national scale long and short-term issuer ratings of BB+(GH) and B(GH) respectively, with a Positive Outlook. Concurrently, the national scale long term issue ratings of the senior unsecured notes under the Medium-Term Notes (“MTN”) programme were also affirmed at BB+(GH), with a Positive Outlook.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|Letshego Ghana Savings and Loans PLC||Long Term issuer||National||BB+(GH)||Positive Outlook|
|Short Term issuer||National||B(GH)|
|AFB1000||Long Term Issue||National||BB+(GH)||Positive Outlook|
|AFB1100||Long Term Issue||National||BB+(GH)||Positive Outlook|
|AFB1200||Long Term Issue||National||BB+(GH)||Positive Outlook|
|AFB1300||Long Term Issue||National||BB+(GH)||Positive Outlook|
|AFB1400||Long Term Issue||National||BB+(GH)||Positive Outlook|
|AFB1500||Long Term Issue||National||BB+(GH)||Positive Outlook|
|AFB1600||Long Term Issue||National||BB+(GH)||Positive Outlook|
|AFB1700||Long Term Issue||National||BB+(GH)||Positive Outlook|
|AFB1800||Long Term Issue||National||BB+(GH)||Positive Outlook|
|AFB1900||Long Term Issue||National||BB+(GH)||Positive Outlook|
|AFB2000||Long Term Issue||National||BB+(GH)||Positive Outlook|
|AFB2100||Long Term Issue||National||BB+(GH)||Positive Outlook|
|AFB2200||Long Term Issue||National||BB+(GH)||Positive Outlook|
|AFB2300||Long Term Issue||National||BB+(GH)||Positive Outlook|
|AFB2400||Long Term Issue||National||BB+(GH)||Positive Outlook|
|AFB2500||Long Term Issue||National||BB+(GH)||Positive Outlook|
The ratings on Letshego Ghana Savings and Loans PLC (“Letshego Ghana”) reflect the company’s relatively weak business profile characterised by its small size and monoline operations partly offset by strengths within its chosen niche. The ratings are also restrained by relatively volatile, albeit improving, asset quality, moderate levels of capitalisation, and funding structure, countered by good levels of liquidity. Furthermore, the ratings benefit from Letshego Holdings Limited parental support.
The company profile strains the ratings given the relatively small size and monoline nature of operations compared to domestic commercial banks, partly offset by a defendable niche within the deduction at source (“DAS”) lending segment, leveraging on the expertise of its parent Letshego Holdings Limited. The company has a modest market share of DAS at approximately 11% of government workers. The mobile loan portfolio exposure was reduced to mitigate portfolio risk resulting in a product mix comprising DAS core business (70%), mobile loans (29%) and other (1%). We expect the mix to be maintained at these levels over the next 12-18 months. However, increasing the DAS portfolio mix without counterparty diversification (government) may increase concentration and pressurise the business profile. On the other hand, increasing lending outside the core business may introduce higher asset quality risk.
Capitalisation is moderate ratings negative. The GCR capital ratio was 14.7% on 31 December 2020, up from 8.2% in December 2019 driven by an impairment recovery of GHC16.8m against a charge of GHC49.7m. We project the GCR Capital ratio to average 18-20% in the next 18 months factoring in 1) sustained strong internal capital generation (c.30%) that outpaces risk weighted asset growth 2) moderate credit losses and 3) normalisation of interest rates close to pre pandemic levels. The conversion of Letshego Holdings subordinated debt to core capital may further boost capitalisation. Reserving is adequate with Stage 3 loans coverage of 69.1% on 31 December 2020 (FY19: 92.6%). Furthermore, losses on mobile loans are offset on collateral deposits.
The risk position balances material improvements in asset quality with high product and sectorial concentrations. The company’s loan portfolio booked healthy credit metrics at December 2020, against industry trends. As a mostly government DAS business, Letshego Ghana was able to remain resilient to the worst effects of COVID-19. We expect credit losses to align with industry averages, if not better due to the DAS product with a collection rate of c.97%. Recoveries are expected to normalise, while provisions increase in line with industry trends. Non-performing loans (“NPLs”) and credit loss ratios registered a decrease from the prior year to 7.4% (FY19: 12.6%) and negative 3.2% (FY19: 10.5%), respectively. While the credit losses improved significantly, product (DAS) and sectorial (public sector) concentration risk is high. Furthermore, the company is inherently exposed to interest rate risk, funding is primarily linked to floating rates and lending is fixed rate.
Funding and liquidity is a positive ratings factor, reflecting the positive asset liability mismatch. Funding is weaker than the market average with a higher reliance on market derived funding. The company is largely funded through MTN programme contributing 44% to total funding and 64% of total borrowings on 31 December 2020. The term profile of MTN consequently reduces reliance on short-term funding. The borrowing maturity is around 50 months against an average tenor of the loan book of approximately 48 months following moderation of short-term mobile loans in favour of payroll lending. The strategy to grow customer deposits (currently 5% of funding) may lower the cost of funds. Liquidity is good, mitigating some of the structural funding weaknesses reflecting a high liquid asset coverage of wholesale funding of 0.29x at 31 December 2020 (FY19: 0.18x) and a positive asset liability mismatch. Considering mobile loans are a significant contributor to 1 month liquidity, we expect the positive mismatch to deteriorate further as the company shifts lending mix by product to DAS. However, in the next 12 to 18 months, there are no immediate plans to run down the mobile book but rather a focus on optimisation of the scoring system.
The issuer ratings benefit from parental support. Letshego Ghana is wholly owned by Letshego Holdings Limited which is headquartered and listed in Botswana, delivering finance 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 the Letshego Group has the capacity to support the company based on its sound financial profile and good geographic diversification.
The Senior Unsecured Notes issued by Letshego Ghana under its MTN Programme are equalised with the issuer rating of BB+(GH). There is no uplift on the unsecured notes rating, noting that the negative pledge serving as security for the notes does not provide any preferential security interest for the programme relative to other senior unsecured creditors of the issuer.
The outlook is positive balancing GCR’s expectation that Letshego Ghana’s financial profile would be resilient despite the strains in the operating environment. We also expect 1) the GCR Capital ratio to average 18-20% in the next 12 to 18 months on the back of, sustained strong internal capital generation outpacing risk weighted asset growth and moderation of collection expenses; 2) sustained healthy asset quality metrics to levels either better than or in line with industry averages; 3) moderately low cost of risk over the next 24 months as the company focuses on higher quality lending and the operating volatility subsides. We also factor in adequate liquidity despite a moderation in the positive asset liability mismatch.
We could raise the ratings if Letshego Ghana raises and maintains a higher GCR capital ratio (above 20%) over the outlook horizon; 2) sustained improvements in asset quality without a deterioration in liquidity; 3) moderation of concentration risk without a commensurate deterioration in asset quality. We could lower the ratings if: 1) credit losses are raised above 3% in the outlook horizon; 2) the positive asset liability mismatch deteriorates; or 3) capitalisation deteriorates either through i) higher than anticipated cost of risk, ii) internal capital generation at levels lower or in line with risk weighted asset growth or iii) the company maintains a GCR capital ratio below 15%.
|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, March 2021|
|GCR Financial Institutions Sector Risk Score, May 2021|
Letshego Ghana Savings and Loans PLC & Medium-Term Notes
Risk Score Summary
|Rating Components & Factors||Risk Scores|
|Country risk score||3.50|
|Sector risk score||3.00|
|Management and governance||0.00|
|Capital and Leverage||(0.50)|
|Funding and Liquidity||0.50|
|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.|
|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. In insurance, it refers to an individual or company’s vulnerability to various risks|
|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.|
|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.|
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 Ghana Savings and Loans PLC. 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 Ghana Savings and Loans PLC 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 Ghana Savings and Loans PLC and other reliable third parties to accord the credit ratings included:
- The audited financial results to 31 December 2020
- 2021 budgets and forecasts
- Four years of comparative audited numbers
- A breakdown of facilities available and related counterparties
- Industry comparative data
- Other related documents.