Johannesburg, 30 November 2017 – Global Credit Ratings has affirmed National Housing Finance Corporation Soc Limited’s national scale ratings of A+(ZA) and A1(ZA) in the long-term and short-term respectively; with the outlook accorded as Stable. Furthermore, Global Credit Ratings has affirmed National Housing Finance Corporation Soc Limited’s international scale long-term local currency rating of BB; with the outlook accorded as Negative.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to National Housing Finance Corporation Soc Limited (“NHFC”, “the Company”) based on the following key criteria:
The accorded ratings of NHFC reflect its weak asset quality, improved profitability, liquidity and capitalisation, while also taking into account the strong support available from its parent, the South African Government (“Government”, “the State”) and its key position as a Development Finance Institution providing affordable housing finance opportunities to the gap market (households who earn between R3,500 and R15,000 per month).
During FY17, NHFC was capitalised (in the form of a grant) by its shareholder to the value of R100m. This was the second tranche of a total of R300m which the shareholder has set aside for the Company’s capitalisation. The remaining R100m (relating to FY18) was paid in the first quarter. A further R80m and R50m in FY19 and FY20 respectively is expected to be granted by the shareholder. Consequently, solvency indicators have remained strong, with the Company recording a total capital to assets ratio of 89.1% at FY17 (FY16: 87.8%).
The loan book was impacted by lower than budgeted disbursements and a switch in the lending mix from private rental to social housing. Impaired loans declined by 13.4% to R419.2m at FY17, which resulted in an improvement in the gross impairment ratio from 20.8% at FY16 to 19.8%. However, the quality of the loan book remains weak with the non-performing book (as a percentage of the gross loan book) increasing from 23% as at FY16 to 24.8% at FY17.
NHFC reported a pre-tax profit of R50.7m in FY17 (FY16: R85.7m pre-tax loss) due to lower impairment charges, improved operational efficiency and increased interest income. During FY17 a significant number of write-offs occurred, which also affected the gross loan values and impairment provision balances. Net interest income increased by 21.5% in FY17 to R217.4m (FY16: -17.3%) as interest income increased by 18.4%, while interest expense decreased by 7.9% in line with reduction in funding. Costs were effectively managed with the cost ratio declining to 38.9% at FY17 (FY16: 41.9%). NHFC’s liquidity improved during the period under review with the liquid to total assets ratio increasing to 29.8% in FY17 (FY16: 26%), supported by shareholder capitalisation and early settlements, but at the expense of slower funding deployment.
Despite NHFC being in an advanced state of consolidation with two other housing DFIs — Rural Housing Loan Fund (“RHLF”), and National Urban Reconstruction and Housing Agency (“NURCHA”) — which will result in NHFC, as a consolidated platform, absorbing RHLF and NURCHA to establish a Human Settlements Development Bank. The ratings do not reflect the effects of the merger (yet to be finalised) which is likely to enhance the combined entity’s capital base and ability to provide affordable housing, among other synergies. In preparation for the consolidation, NHFC has been exempted from normal tax with effect from FY17.
A significant improvement in asset quality, sustained profitability and improved liquidity, combined with a favourable operating environment could result in an upward movement in the rating. A downward movement could result from lack of improvement in asset quality, decline in earnings, a challenging operating environment, and the potential inability to gain access to sufficient funding and/or covenant breaches.
|NATIONAL SCALE RATINGS HISTORY||INTERNATIONAL SCALE RATING HISTORY|
|Initial rating (February 2004)||Initial rating (November 2013)|
|Long term: AA-(ZA); Short term: A1+(ZA)||Long term: BBB|
|Outlook: Stable||Outlook: Stable|
|Last rating (November 2016)||Last rating (May 2017)|
|Long term: A+(ZA); Short term: A1(ZA)||Long term: BB|
|Outlook: Negative||Outlook: Negative|
|Primary Analyst||Committee Chairperson|
|Kurt Boere||Jennifer Mwerenga|
|Senior Credit Analyst||Senior Credit Analyst|
|(011) 784-1771||(011) 784-1771|
|Junior Credit Analyst|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2017
Global Criteria for Rating Finance and Leasing Companies, updated March 2017
NHFC rating reports (2004-16)
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.
National Housing Finance Company Soc Limited participated in the rating process via 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 National Housing Finance Company Soc Limited with no contestation of the ratings.
The information received from National Housing Finance Company Soc Limited and other reliable third parties to accord the credit ratings included:
- Audited financial results of the group and to 31 March 2017 (plus four years of comparative numbers);
- Interim financial results of the group and to 30 September 2017;
- Latest internal and/or external audit reports to management;
- Corporate governance and enterprise risk framework.
The ratings above were solicited by, or on behalf of, National Housing Finance Company Soc 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
|Asset||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|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 (ie, 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.|
|Capital Base||The issued capital of a company, plus reserves and retained profits.|
|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.|
|Downgrade||The assignment of a lower credit rating to a company or sovereign borrower’s debt by a credit rating agency. Opposite of upgrade.|
|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.|
|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.|
|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.|
|International Scale Rating LC||International local currency (International LC) ratings measure the likelihood of repayment in the currency of the jurisdiction in which the issuer is domiciled. Therefore, the rating does not take into account the possibility that it will not be able to convert local currency into foreign currency or make transfers between sovereign jurisdictions.|
|Long-Term||Not current; ordinarily more than one year.|
|Long-Term Rating||Reflects an issuer’s ability to meet its financial obligations over the following three to five year period, including interest payments and debt redemptions. This encompasses an evaluation of the organisation’s current financial position, as well as how the position may change in the future with regard to meeting longer term financial obligations.|
|National Scale Rating||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.|
|Performing Loan||A loan is said to be performing if the borrower is paying the interest on it on a timely basis.|
|Provision||The amount set aside or deducted from operating income to cover expected or identified loan losses.|
|Rating Outlook||Indicates the potential direction of a rated entity’s rating over the medium term, typically one to two years. An outlook may be defined as: ‘Stable’ (nothing to suggest that the rating will change), ‘Positive’ (the rating symbol may be raised), ‘Negative’ (the rating symbol may be lowered) or ‘Evolving’ (the rating symbol may be raised or lowered).|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Shareholder||An individual, entity or financial institution that holds shares or stock in an organisation or company.|
|Short-Term||Current; ordinarily less than one year.|
|Short-Term Rating||An opinion of an issuer’s ability to meet all financial obligations over the upcoming 12 month period, including interest payments and debt redemptions.|
|Tranche||Used to mean an allocation or instalment of a larger loan facility. Tranches of the same debt programme may differ from each other because they pay different interest rates, mature on different dates, carry different levels of risk, or differ in some other way.|
For a detailed glossary of terms please click here
GCR affirms National Housing Finance Corporation Soc Limited’s rating at A+(ZA); Outlook Stable.