Announcements Financial Institutions Rating Alerts

GCR affirms the national scale issuer ratings on Letshego Micro Financial Services (Namibia) (Pty) Limited and Letshego Holdings (Namibia) Limited; Outlook Stable

Rating Action

Johannesburg, 27 September 2021 – GCR Ratings (“GCR”) has affirmed Letshego Micro Financial Services (Namibia) (Pty) Limited’s national scale long-term 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 Micro Financial Services (Namibia) (Pty) Limited Long Term issuer National A(NA) Stable Outlook
Short Term issuer National A1(NA)

Simultaneously, GCR has also affirmed Letshego Holdings (Namibia) Limited’s national scale long term 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 Holdings (Namibia) Limited Long Term issuer National A(NA) Stable Outlook
Short Term issuer National A1(NA)

Rating Rationale

Letshego Micro Financial Services (Namibia) (Pty) Limited

The ratings on Letshego Micro Financial Services (Namibia) (Pty) Limited (“LMFSN”, “the company”) reflect the credit profile of Letshego Holdings Namibia Limited (“LHN”, “the Group”). GCR believes the company is a core part of the Letshego Namibia group. In September 2021, LMFSN contributed the most to Group advances (58%), assets and revenues and we do not expect this to change over the next 12 to 18 months. As such, the ratings of LMSFN are equalised to the Group Anchor Credit Evaluation (“ACE”)/ group credit profile. Although unlikely in the medium term, if the level of importance reduces, the ratings on LMFSN may be delinked from the group ACE.

The ratings are restrained by the Group’s small size, moderately high cost of funding and relative lack of diversity. 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. The Group has leading market shares in micro lending with competitive interest rates. However, the strengths within its chosen niche are partly offset by relatively small size and monoline nature of operations than the large domestic banks and related micro lenders operating in Namibia. This also leaves the Group subject to deterioration in competitive strength should Namibian Savings and Credit Co-operatives (“NAMSACCO”), the Ministry of Finance’s own saving and borrowing solutions for public servants become fully operational. That said, we do not expect a change in the Group’s competitive position over the next 12 months. LMFSN is leveraging on synergies with its sister company Letshego Bank Namibia Limited (“LBN”) to facilitate migration of DAS clients to banking customers. 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. Namibia’s financial sector is dominated by four large and heterogeneous financial conglomerates, most with close ownership and funding links to South Africa.

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 and 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.

The risk position balances industry average asset quality with high product concentrations and transformational risk if the deduction code is not renewed. LBN business model is based on the Deductions at Source Code and the absence therefore would impact the Group’s finances and operations drastically. However, increasing lending outside the core business may 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.

Funding is weaker than the market average with a higher reliance on market derived funding and LHL support. 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 on 30 June 2021. Further reliance is placed on LHL for liquidity management in the form of an off-balance sheet facility. 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. Liquidity is just 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 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 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. GCR believes this may result in lower parental support from LHL in that regard.

Letshego Holdings (Namibia) Limited

Letshego Holdings (Namibia) Limited (the holding company) are equalised to the group ACE reflecting the structural status of Intermediate Non-Operating Holding Companies (“INOHC”). This reflects GCR’s opinion that, 1) while the INOHC is reliant on cash flows and dividends from largely regulated, operating group companies (like Non-Operating Holding Companies (“NOHC”)), 2) the Group also benefits from parent support which flows through the INOHC. However, if support flow reduces or double leverage increases, the ratings may be lowered reflecting the structurally subordinated status of NOHC.

Outlook Statement

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 cementing 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.

Rating Triggers

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 delink or lower the ratings on LMFSN or the INOHC if we view the group importance (in the case of the former) decrease or double leverage increase/ support decrease (in the case of the latter).

Analytical Contacts

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

Ratings History

Letshego Micro Financial Services (Namibia) (Pty) Limited

Rating class Review Rating scale Rating Outlook/Watch Date
Long Term issuer Initial National A(NA) Stable Outlook December 2020
Long Term issuer Last National A(NA) Stable Outlook December 2020
Short Term issuer Initial National A1(NA) N/A December 2020
Short Term issuer Last National A1(NA) N/A December 2020

Letshego Holdings (Namibia) Limited

Rating class Review Rating scale Rating Outlook/Watch Date
Long Term issuer Initial National A(NA) Stable Outlook December 2020
Long Term issuer Last National A(NA) Stable Outlook December 2020
Short Term issuer Initial National A1(NA) N/A December 2020
Short Term issuer Last National A1(NA) N/A December 2020

Risk Score Summary

Rating Components & Factors Risk Scores
Operating environment 10.50
Country risk score 5.50
Sector risk score 5.00
Business profile (3.50)
Competitive position (3.50)
Management and governance 0.00
Financial profile 2.75
Capital and Leverage 4.00
Risk (0.50)
Funding and Liquidity (0.75)
Comparative profile 1.00
Group support 1.00
Government support 0.00
Peer analysis 0.00
Total Score 10.75

Glossary

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 entities, security or financial instrument being rated; and c.) such ratings were an independent evaluation of the risks and merits of the rated entities, security or financial instrument.

The credit ratings have been disclosed to Letshego Micro Financial Services (Namibia) (Pty) Limited and Letshego Holdings (Namibia) Limited. The ratings above were solicited by, or on behalf of, the rated entities, and therefore, GCR has been compensated for the provision of the ratings.

Letshego Micro Financial Services (Namibia) (Pty) Limited and Letshego Holdings (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 the rated entities 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.
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