Johannesburg, 17 July 2014 — Global Credit Ratings (“GCR”) has today affirmed the national scale ratings assigned to Trustco Group Holdings Limited of BBB-(NA) and A3(NA) in the long term and short term respectively; with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
GCR has accorded the above credit rating(s) to Trustco Group Holdings Limited (“Trustco”, “the group”) based on the following key criteria:
Trustco has an established and expanding franchise in its main areas of operation (education, student and mortgage finance, insurance, and property development), and markets (Namibia and South Africa). A sound capital structure, low/moderating credit risk and improving profitability support the rating, which excludes the prospect of systemic support, given its low likelihood. The rating/s outlook considers Trustco’s enhanced prospects and strategic focus, viewed in the context of divergent macroeconomic trends in its core markets: Namibia’s sound economic growth and a stable inflation/interest rate environment supporting consumer health contrasts with South Africa’s negative macroeconomic trends which impact consumer confidence and the credit cycle.
In F14, growth in property and lending balances resulted in capital coverage of assets declining from 63.2% (FYE13) to 48.3% (FYE14), and net debt to capital rising to 48.9% (FYE13: 29.3%), while interest cover is generous at 14.2% (F13: 14.3%). Swift asset/debt growth without a commensurate increase in profit may place strain on capital resources and leverage. Nevertheless, to date, Trustco has managed growth/dividend policies to maintain adequate capital, while remaining within covenanted levels.
Credit metrics on student loans (representing 80% of finance segment loans) improved. The impairment ratio on student loans fell from 4.7% (FYE13) to 3.5% (FYE14) with all impaired loans provided for. There were no impaired mortgage loans at FYE14. In F14, group income grew 54.6% and net profit rose 6.4x to NAD252.6m (F13: NAD39.4m). The South African insurance operations posted losses (related to business closure/setup costs), and all Namibian businesses performed well. The property segment contributed NAD215.5m to the bottom line.
Earnings prospects seem positive in all business segments. Sales of educational courses are gaining momentum; consequently growth in student finance has a strong outlook. More consistency in property sales should result in meaningful/consistent segment contributions to earnings going forward, supported by mortgage lending. Insurance is entering an expansion phase, with new products/capacity likely to yield benefits in F15 and beyond.
Factors that could trigger a positive rating action include positive earnings evolution across all business segments, combined with stability in the operational business structure and conservatism in capitalisation/leverage metrics. The ratings could be negatively impacted by declining asset quality, integration challenges relating to new acquisitions, increases in debt which impact the group’s ability to maintain leverage within covenanted levels, and adverse macroeconomic developments in key markets.
For a detailed glossary of terms utilised in this announcement please click here
NATIONAL SCALE RATINGS HISTORY
Initial rating (July/2012)
Long term: BBB-(NA); Short term: A3(NA)
Last rating (July/2013)
Long term: BBB-(NA); Short term: A3(NA)
Senior Credit Analyst
Sector Head: Financial Institution Ratings
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
GCR’s Global Master Criteria for Rating Banks and Other Financial Institutions
Trustco Group Holdings Limited Rating Reports (up to July 2013)
RATING LIMITATIONS AND DISCLAIMERS
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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; c.) such rating was an independent evaluation of the risks and merits of the rated entity; and d.) the validity of the rating is for 12 months, or as indicated by the applicable credit rating document.
The ratings were solicited by, or on behalf of, Trustco Group Holdings Limited, and therefore, GCR has been compensated for the provision of the ratings.
Trustco Group Holdings Limited participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of info received was considered adequate and has been independently verified where possible.
The credit ratings above were disclosed to Trustco Group Holdings Limited with no contestation of/changes to the ratings.
The information received from Trustco Group Holdings Limited and other reliable third parties to accord the credit ratings included the audited annual financial statements as at 31 March 2014 (plus four years of comparative numbers), latest internal and/or external reports to management, full year detailed budgeted income statements (to 31 March 2015), corporate governance and enterprise risk framework, reserving methodologies, capital management policy, Industry comparative data and regulatory framework and a breakdown of facilities available and related counterparties at 31 March 2014.
GCR affirms Trustco Group Holdings Limited’s rating of BBB-(NA); Outlook Stable.