Announcements Financial Institutions Rating Alerts

GCR affirms Trust for Urban Housing Finance Limited’s Issuer Long Term national scale rating at BBB(ZA), Outlook Negative.

Rating Action

Johannesburg, 12th September 2019 – GCR Ratings (‘GCR’) has affirmed Trust for Urban Finance Limited’s long-term and short-term South African national scale ratings at BBB(ZA) and A3(ZA) respectively, with the outlook accorded as Negative. At the same time, the long-term international scale rating has been withdrawn without review.

Rated Entity / Issue Rating class Rating scale Rating Outlook / Watch
Trust for Urban Housing Finance Limited Issuer Long Term National BBB(ZA) Negative Outlook
Issuer Short Term National A3 –

GCR has reviewed the ratings on Trust for Urban Housing Finance Limited under the Criteria for Rating Financial Institutions and Criteria for Rating Financial Services Companies, May 2019. The ratings were placed “Under Criteria Observation” at the time of criteria publication. Subsequently, GCR has finalised the review under the two new methodologies, and the ratings have been removed from ‘Under Criteria Observation’.

Rating Rationale

The ratings reflect TUHF’s relatively weak competitive position in comparison to rated peers, balancing its track record operating in South Africa’s otherwise neglected inner city property market, and adequate revenue stability; with a monoline business model, difficult to defend niche, and limited geographic diversification. We also take into account TUHF’s strong Environmental, Social and Governance (‘ESG’) characteristics and impact, which boosts competitive advantage and provides additional access to sources of funding.

With a GCR leverage ratio of 12.4% for FY19, GCR considers TUHF’s capital position to be adequate. We expect TUHF to gradually erode capital buffers, over the next two years, as internal capital generation fails to keep up with risk asset growth. Whilst revenues are stable TUHF’s bottom line has faced pressure over the past couple of years, with thinning margins and increasing prepayments bring the return on assets to 1.2% at FY19 from 1.6% at FY18.

Historically, TUHF have operated with low levels of credit losses (below 0.5%), low non-performing loans (below 3%) and a good level of reserve coverage (well above 80%). At the same time, very high loan book concentrations are an inherent part of the business (with the loans to top 5 clients c. 30% of total loans, and more than 2x capital at FY19) leaving TUHF vulnerable to shocks from large single obligor defaults. The gross NPL ratio increased sharply to 9.2% at FY18 from 2.5% at FY17, partially due a change in accounting methodology but also due to the failure of one large borrower. At the same time, loan loss reserve coverage reduced to c. 28% of non-performing loans at FY18, which is considered to be low, however we continue to factor in a strong recovery of bad debts due to the generally good levels of collateral.

GCR views TUHF’s funding structure and liquidity to be a ratings weakness. TUHF is exclusively wholesale funded, with cost of funding high relative to peers and commercial banks. However, we do expect a slight decrease in the cost of funding over the next 12-18months, as a result of diversifying the funding structure through the ZAR 2 billon debt programme and MBS programme. Currently, funding concentrations remain high but improving, with the top 1 and 5 funders at 30% (FY18: 43%) and 56% (FY18: 78%) of total funding (excluding mortgage backed securities) respectively. At the same time, the liquidity position remains tight. With the level of GCR liquid assets/ short-term wholesale funding coverage at c. 0.15x, TUHF is reliant on the timeous repayment of principle and interest, alongside access to the wholesale market for ongoing liquidity, which is of some concern.

Outlook Statement

The Negative outlook reflects the risk of a diminishing competitive position as a result of a difficult to defend niche, the resultant prepayments and a loss of market share, high loan book concentrations, and a weak funding and liquidity position.

Rating Triggers

A downgrade could arise from the failure to stabilise and maintain the asset quality at historical levels along with a reduction in the loan book concentration, and a reduction in cost of funding as expected to support the competitive position. Any deterioration in liquidity ratios could also bring the rating down. Due to the current balance of rating factors, we consider there to be limited upward ratings potential over the ratings horizon.

Analytical Contacts

Primary analyst Simbarake Chimutanda Financial Institutions Analyst
Johannesburg, ZA SimbarakeC@GCRratings.com +27 11 784 1771
Secondary analyst Thandolwenkosi Mkwanazi Financial Institutions Associate
Johannesburg, ZA ThandolwenkosiM@GCRratings.com +27 11 784 1771
Committee chair Mathew Pirnie Sector Head: Financial Institutions
Johannesburg, ZA MathewP@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, July 2019

Ratings History

Trust for Urban Housing Finance Limited

Rating class Review Rating scale Rating class Outlook Date
Issuer Long Term Initial National BBB-(ZA) Stable September 2013
Last National BBB(ZA) Negative October 2018
Issuer Short Term Initial National A3(ZA) September 2000
Last National A3(ZA) October 2018

Risk Score Summary

Risk score 10.5
Operating environment 12.5
Country risk score 7.5
Sector risk score 5
Business profile -1.5
Competitive position -1.5
Management and governance 0
Financial profile -0.5
Capital and Leverage 1
Risk 0.5
Funding structure and Liquidity -2
Comparative profile 0
Group support 0
Government support 0
Peer analysis 0

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

The credit rating has been disclosed to Trust for Urban Housing Finance Limited. The ratings above were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating.

Trust for Urban Housing Finance participated in the rating process via telephonic communications, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information received from Trust for Urban Housing Fund Limited and other reliable third parties to accord the credit rating included:

  • Audited financial results of TUHF Holdings Limited as at 31 March 2019;
  • Audited financial results of TUHF Limited as at 31 March 2019;
  • Audited financial results of TUHF Urban Finance (RF) Limited as at 31 March 2019;
  • Loan book analysis information as at March 2019;
  • Environmental, Social and Governance Quarterly Report June 2019.


ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK:HTTP://GCRRATINGS.COM. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT WWW.GCRRATINGS.COM/RATING_INFORMATION. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR's CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THIS SITE.

CREDIT RATINGS ISSUED AND RESEARCH PUBLICATIONS PUBLISHED BY GCR, ARE GCR’S OPINIONS, AS AT THE DATE OF ISSUE OR PUBLICATION THEREOF, OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. GCR DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL AND/OR FINANCIAL OBLIGATIONS AS THEY BECOME DUE. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: FRAUD, MARKET LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND GCR’S OPINIONS INCLUDED IN GCR’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. CREDIT RATINGS AND GCR’S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND GCR’S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL OR HOLD PARTICULAR SECURITIES. NEITHER GCR’S CREDIT RATINGS, NOR ITS PUBLICATIONS, COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. GCR ISSUES ITS CREDIT RATINGS AND PUBLISHES GCR’S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING OR SALE.

Copyright © 2022 GCR INFORMATION PUBLISHED BY GCR MAY NOT BE COPIED OR OTHERWISE REPRODUCED OR DISCLOSED, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT GCR’S PRIOR WRITTEN CONSENT. Credit ratings are solicited by, or on behalf of, the issuer of the instrument in respect of which the rating is issued, and GCR is compensated for the provision of these ratings. Information sources used to prepare the ratings are set out in each credit rating report and/or rating notification and include the following: parties involved in the ratings and public information. All information used to prepare the ratings is obtained by GCR from sources reasonably believed by it to be accurate and reliable. Although GCR will at all times use its best efforts and practices to ensure that the information it relies on is accurate at the time, GCR does not provide any warranty in respect of, nor is it otherwise responsible for, the accurateness of such information.GCR adopts all reasonable measures to ensure that the information it uses in assigning a credit rating is of sufficient quality and that such information is obtained from sources that GCR, acting reasonably, considers to be reliable, including, when appropriate, independent third-party sources. However, GCR cannot in every instance independently verify or validate information received in the rating process. Under no circumstances shall GCR have any liability to any person or entity for (a) any loss or damage suffered by such person or entity caused by, resulting from, or relating to, any error made by GCR, whether negligently (including gross negligence) or otherwise, or other circumstance or contingency outside the control of GCR or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits) suffered by such person or entity, as a result of the use of or inability to use any such information. The ratings, financial reporting analysis, projections, and other observations, if any, constituting part of the information contained in each credit rating report and/or rating notification are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. Each user of the information contained in each credit rating report and/or rating notification must make its own study and evaluation of each security it may consider purchasing, holding or selling. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY GCR IN ANY FORM OR MANNER WHATSOEVER.