Johannesburg, 5 December 2019 – GCR Ratings (“GCR”) has reviewed the ratings of AFB (Ghana) Plc under the recently released Criteria for Rating Financial Institutions, May 2019.
AFB (Ghana) Plc’s long and short-term Ghanaian national scale ratings have been affirmed at BB+(GH)/B(GH) respectively. The outlook has been accorded as Stable.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook / Watch|
|AFB (Ghana) Plc||Issuer Long Term||National||BB+(GH)||Stable Outlook|
|Issuer Short Term||National||B(GH)||n.a|
On May 22, 2019 GCR announced that it had released new criteria for all banks and bank-like entities. This methodology is titled Criteria for Rating Financial Institutions. As a result, the ratings were placed “Under Criteria Observation”. Subsequently, GCR has finalised the review under the new methodology. As a result, the ratings have been removed from ‘Under Criteria Observation’ and the rating revised in line with the new methodology.
The below ratings factor in the following core elements of Ghanaian Country and Financial Institutions Sector risk into the assessment.
Republic of Ghana, Country Risk Score: ‘3.75’.
The Ghana country risk score of ‘3.75’ is supported by above average institutional strength scores for the sub-Saharan region and strong levels of economic growth, estimated to be around 7% in 2019/2020. The score is restrained by the relatively weaker external and moderate fiscal position of the sovereign, alongside the low wealth levels of the population.
Ghanaian non-bank financial Institutions Sector Risk score: ‘1.5’
The Ghanaian financial institutions sector risk score of ‘2.5’ is restrained by the modest fiscal position of the government and state-owned enterprises, the currently high stock of sector wide nonperforming loans of approximately 18% at August 2019 and moderately high foreign currency lending (33% of total loans). We also consider the banking sector to be somewhat fragmented and regulated in line with regional norms. Broadly, we consider the 2018 regulatory reforms and recapitalization to have been a success in stabilizing the system. The banking sector is also considered to be adequately capitalized, with total CAR averaging around 19.8% at August 2019. Profitability is sound and improving, with a return on assets around 4.3% at August 2019, but the operating efficiency remains low. Local deposits are the primary funding source, with limited wholesale or external funding. Liquidity is sound, with cash and balances due from banks accounting for 35% of total assets. Fixed income markets are underdeveloped. We have lowered the sector risk score for non-bank financial institutions to ‘1.5’ to reflect the less stringent prudential regulation and oversight, alongside a lack of access to the Central Bank window.
The ratings on AFB (Ghana) Plc (“AFB”, “the company”) reflect its relatively small size and monoline operations relative to domestic commercial banks, anticipated adequate capitalisation, a relatively weak risk position, and less stable funding structure countered by good liquidity.
AFB’s competitive position is a negative ratings factor. The company profile is a relative strain to 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 micro lending segment leveraging on the expertise of its parent Letshego Holdings Limited (“Letshego”). At 31 December 2018, the smallest commercial bank had total operating assets amounting to GHS603m (0.7% market share), comparatively, AFB had total assets of GHS463m at FY18. Furthermore, the company’s operations are significantly smaller, less diverse (by product and business lines). Despite the comparatively high cost of funds (9.3% at June 2019 (FY18: 17.5%)), revenues have been fairly stable.
Capitalisation is a positive ratings factor, reflecting anticipated improvements in the leverage ratio due to strong internal capital generation. The company had a modest GCR leverage ratio of 8.7% at 30 June 2019, up from 6.9% at FY18. However, we expect To see improvements in the GCR leverage ratio of 10% in the medium term, increasing to 12% in 2020 from sustained strong internal capital generation, outpacing risk weighted asset growth. Earnings are sound, leveraging on the growth of mobile loans with net interest margins of c.30%, however, the portfolio is increasing asset quality risks.
The risk position is a negative rating factor, as a result of higher than average credit losses. AFB’s credit losses increased materially from 1.5% at 31 December 2017 to 9.7% at 30 June 2019 (FY18: 9.1%). GCR believes the high credit losses follow the product shift toward mobile loans from payroll lending, highlighting a heighted risk appetite. At 31 December 2018, payroll loans contributed 50.4% towards gross loans compared to 85.1% at FY17. Product offering to the informal segment also increased to 49.3% at FY18 from 14.5%. Positively, the gross non-performing ratio (8% at 30 Sept 2019) was better than industry average, with no foreign currency lending and minimal lending concentrations.
AFB’s funding is relatively more expensive in comparison to commercial banking peers in Ghana. However, in order to lower the cost of funds, the company has changed its strategy to grow its deposit book, which it did from a low base by 3,6x at FY18. Core deposits contributed a high 12.6% to total funding at 31 Dec’18 from 8.5% at FY17. Concurrently, funding is still primarily from borrowings. Liquidity is good, mitigating some of the structural funding weaknesses. Liquidity management is also short term focused as evidenced by high liquidity asset coverage of short-term wholesale funding of 54% at 31 December 2018 and the positive asset/ liability mismatch.
The ratings benefit from parental support. AFB is wholly owned by Letshego Group 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 Letshego has the capacity to support the company based on its sound financial profile and good geographic diversification.
The outlook on the company is stable, balancing an expectation that the company will build capital, and improve asset quality and its funding structure.
We could raise the ratings if AFB raises and maintains a higher GCR leverage ratio (above 15%) over the outlook horizon, alongside sustained improvements in asset quality. We could lower the ratings if asset quality or capital deteriorates. We could also bring down the ratings if there is evidence of weaker shareholder support.
|Primary analyst||Vimbai Muhwati||Financial Institutions Analyst|
|Johannesburg, ZA||VimbaiM@GCRratings.com||+27 11 784 1771|
|Secondary analyst||Simbarake Chimutanda||Financial Institutions Analyst|
|Johannesburg, ZA||SimbarakeC@GCRratings.com||+27 11 784 1771|
|Committee chair||Matthew Pirnie||Sector Head: Financial Institutions|
|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 Scale, Symbols & Definitions, May 2019|
|GCR Country Risk Scores, June 2019|
|GCR Financial Institutions Sector Risk Score, December 2019|
|AFB (Ghana) Plc report, May 2018|
|Rating class||Review||Rating scale||Rating class||Outlook||Date|
|Issuer Long Term||Initial||National||BB(GH)||Stable||May 2014|
|Issuer Long Term||Last||National||BB+(GH)||Stable||May 2018|
|Issuer Short Term||Initial||National||B(GH)||n.a||May 2014|
|Issuer Short Term||Last||National||B(GH)||n.a||May 2018|
Risk Score Summary
|Country risk score||3.75|
|Sector risk score||1.50|
|Management and governance||0.00|
|Capital and Leverage||0.50|
|Funding structure and Liquidity||0.00|
|National scale rating||BB+/B|
|Capital||The sum of money that is invested to generate proceeds.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing 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.|
|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.|
|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.|
Salient Points 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; and c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
AFB (Ghana) Plc participated in the rating process via face-to-face 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 AFB (Ghana) Plc and other reliable third parties to accord the credit rating included:
- Audited financial results as at 31 December 2018;
- Unaudited financial results as at 30 June 2019;
- Unaudited interim results as at 30 September 2019;
- A breakdown of facilities available and related counterparties; and
- Industry comparative data.