Johannesburg, 29 September 2017 – Global Credit Ratings has affirmed the national scale ratings of BBB(ZA) and A3(ZA) accorded to Trust for Urban Housing Finance (“TUHF Group”) in the long term and short term respectively; with the outlook accorded as Stable. Furthermore, Global Credit Ratings has affirmed the international scale local currency (LC) rating of Trust for Urban Housing Finance at B+; with the outlook accorded as Negative.
Global Credit Ratings (“GCR”) has accorded the above credit ratings to TUHF Group based on the following key criteria:
The ratings reflect entrenchment of TUHF Group’s (“the group”) inner-city mortgage finance business, together with its sustainable operating model, clear strategy, strengthening risk/operational practices, increased geographic spread, and support from an increasingly diversified equity and funding partner base.
In FY17, TUHF issued the first R280m tranche of senior secured debt under its R1.0bn Domestic Medium Term Note (“DMTN”) programme listed on the Johannesburg Stock Exchange (“JSE”). Furthermore, a R200m grant by National Treasury’s Jobs Fund has bolstered TUHF Group’s medium-term growth trajectory. During FY17, TUHF Group received R71m in grant funding.
Pre-tax profit rose 48.4% to R53m in FY17, driven by an expanded credit portfolio (up 13.4%) and improving operational efficiencies. The net interest margin (“NIM”) increased to 5.5% at FY17 (FY16: 4.9%). Driven by economies of scale, the cost/income ratio decreased to 52.6% in FY17 (FY16: 59.8%). Overall, ROaA remained stable at 0.6% at FY17, while ROaE continued with the downward trajectory decreasing to 6.1% (FY16: 10.6%).
The injection of grant funding (Tier 2 capital) boosted the capital/assets ratio to 17.5% (FY16: 15.3%), against a long-term target of 10%, which GCR deems adequate in light of business composition and risk.
Asset quality improved in FY17, with past due loans decreasing to 6.3% of gross loans at FY17 (FY16: 8.8%). Furthermore, credit losses remained in the 0.6-0.8% range, given the adequacy of provisioning, and the significant quantum, quality and perfectibility of collateral in place.
Liquidity risk has remained well managed. The group’s enhanced treasury/funding management sophistication mitigates refinancing risk associated with short tenor funding. However, future funding choices may raise exposure to interest rate and/or currency risk, but are likely to be hedged.
Maintenance of the group’s asset quality, and stronger earnings generation enhanced by strengthening of the group’s competitive position together with significant increases in scale, and funding diversification could have a positive impact on the ratings. Negative rating action would likely follow a reversal in trends in asset quality, capitalisation, and/or liquidity metrics currently observed, coupled with un-remedied covenant breaches.
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|Primary Analyst||Committee Chairperson|
|Simbarake Chimutanda||Kurt Boere|
|Credit Analyst||Senior Credit Analyst|
|(011) 784-1771||(011) 784-1771|
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
TUHF Group rating report (2013-16)
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/RATING-SCALES-DEFINITIONS. 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.
Trust for Urban Housing Finance (TUHF Group) participated in the rating process via management meetings, 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 Trust for Urban Housing Finance (TUHF Group) with no contestation of the ratings.
The information received from Trust for Urban Housing Finance (TUHF Group) and other reliable third parties to accord the credit ratings included:
- Financial results of TUHF Group to 31 March 2017 (plus four years of audited comparative numbers);
- Management accounts of TUHF Group to 30 June 2017;
- Latest internal and/or external audit reports to management;
- A breakdown of facilities available and related counterparties; and
- Corporate governance and enterprise risk framework.
The ratings above were solicited by, or on behalf of, Trust for Urban Housing Finance (TUHF Group), 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.|
|Collateral||Asset provided to a creditor as security for a loan.|
|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.|
|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 investments, 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.|
|Equity||Equity (or shareholders’ funds) is the holding or stake that shareholders have in a company. Equity capital is raised by the issue of new shares or by retaining profit.|
|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.|
|Hedge||A risk management technique used to reduce the possibility of loss resulting from adverse movements in commodity prices, equity prices, interest rates or exchange rates arising from normal banking operations. Most often, the hedge involves the use of a financial instrument or derivative such as a forward, future, option or swap. Hedging may prove to be ineffective in reducing the possibility of loss as a result of, inter alia, breakdowns in observed correlations between instruments, or markets or currencies and other market rates.|
|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.|
|Interest Rate||The charge or the return on an asset or debt expressed as a percentage of the price or size of the asset or debt. It is usually expressed on an annual basis.|
|Liquidity Risk||The risk that a company may not be able to meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets. Regarding securities, the risk that a financial instrument cannot be traded at its market price due to the size, structure or efficiency of the market.|
|Provision||The amount set aside or deducted from operating income to cover expected or identified loan losses.|
|Senior Secured Debt||Secured Debt that is paid first in the event of a default.|
|Tenor||The time from the value date until the expiry date of a financial instrument.|
|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 Trust for Urban Housing Finance’s national scale credit rating at BBB(ZA), Stable Outlook