Lagos, 16 April 2021 – GCR Ratings (“GCR”) has affirmed WSTC Financial Services Limited’s national scale long-term and short-term ratings of BBB-(NG) and A3(NG) respectively, with a Stable Outlook.
|Rated Entity||Rating class||Rating scale||Rating||Outlook / Watch|
|WSTC Financial Services Limited||Long Term issuer||National||BBB-(NG)||Stable Outlook|
|Short Term issuer||National||A3(NG)|
The ratings of WSTC Financial Services Limited (“WSTC” or “the company”) reflect its strong capitalisation, good risk position, and adequate liquidity but with a substantially short tenored funding base. However, these strengths are partly offset by the company’s limited competitive position and market share, as well as the elevated loan book concentration, reflective of its niche nature and the relatively small customer base.
WSTC is a non-bank financial institution, operating predominantly in Nigeria with a relatively strong franchise and proven track record spanning over three decades. The company operates as a niche player, providing secured credit facilities to high-net-worth individuals (“HNIs”), retail, and small and medium scale enterprises (“SMEs”). These loans are typically backed by tradable securities or other tangible assets, which can be sold or repledged in the event of default. In addition, the company renders investment management, treasury management and financial advisory services to meet specific needs of its clients. However, WSTC’s market share is considered moderate, with competitive position constrained by limited local geographic diversification and the fact that its business model is targeted largely at the HNIs. Management & Governance is a neutral ratings factor.
WSTC’s risk position is sound and viewed as a positive rating factor. The company has consistently reported no non-performing loans (“NPL”) over the review period and with credit losses broadly comparable with the industry average. This is mainly underpinned by WSTC’s prudent risk management, stringent and cautious lending approach exhibited over the years. Conversely, loan book concentration is assessed at an elevated level, with the single and twenty largest obligors constituting 16.9% and 92.9% of the loan portfolio respectively at 3Q FY20, although still within the regulatory single obligor limit. While loan concentration is typical of finance companies in Nigeria, we expect a somewhat diversified loan portfolio over the next 12-18 months, given the company’s anticipated expansion strategy. Also, despite the economic impact of the COVID-19 pandemic, we expect a mild adverse effect on WSTC’s asset quality (loans and advances), with NPLs and credit losses expected to be contained over the rating horizon.
WSTC’s strong capitalisation is a key rating strength, with the capital adequacy ratio (“CAR”) historically maintained well above the regulatory threshold. As at 3Q FY20, CAR stood at a strong 34.7% (FY19: 50.0%), comfortably exceeding the minimum requirement of 12.5%. Similarly, GCR’s computed core capital ratio of 34.7% at 3Q FY20 (FY19: 49.8%) is considered robust. Over the next 12-18 months, we expect capitalisation metrics to moderate slightly (but remaining at a sound level) on the back of GCR’s expectation that the company would increase lending activities in a bid to augment earnings amidst the low-yield environment. We also believe the imminent plans to issue bonds might also weigh down the CAR assessment (albeit remaining comfortably above regulatory threshold), given the unqualifying capital nature of the proposed bond and the consequential impact on risk weighted asset computation.
Funding and liquidity is assessed to be intermediate, given the highly short tenored funding structure. As a non-deposit taking institution, WSTC is financed through equity and borrowings, which constituted 24.3% and 75.7% of the funding base as at 3Q FY20. Borrowings are mainly sourced from HNIs through the issuance of short-term commercial papers with tenors largely ranging between one and three months. However, inherent liquidity risk is partially mitigated by the fact that a sizeable portion of borrowings are usually rolled over at maturity, although at the discretion of the borrowers given their pricing sensitivities. In a bid to further complement the subsisting short term funding base, the company is in the process of raising medium-term funding through the issuance of bonds. This is viewed positively given the embedded funding stability propensity.
The stable outlook reflects GCR’s expectations that the successful issuance of the proposed bonds would further stimulate WSTC’s liquidity profile, funding stability and expansion in operational scale. We expect NPL and credit losses to remain contained and comparable with peers, provided the company maintains its stringent and cautious lending approach. Also, we anticipate capitalisation to remain a rating positive and the operational expansion strategy would further support earnings accretion over the outlook horizon.
A positive rating movement could be triggered by improved stability in the funding structure, enhanced competitive position, maintenance of risk and capitalisation at sound levels, as well as further diversification of the loan portfolio. Conversely, a rating downgrade could follow a material deterioration in asset quality metrics (NPL and Credit Losses), capitalisation, and constrained internal capital generation capacity.
|Primary analyst||Yinka Adeoti||Financial Institutions Analyst|
|Lagos, NG||Adeoti@GCRratings.com||+234 1 904 9462|
|Committee chair||Vinay Nagar||Senior Financial Institutions Analyst|
|Johannesburg, ZA||Vinay@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 Nigeria Country Risk Scores, February 2021|
|GCR Nigeria Financial Institutions Sector Risk Score, February 2021|
WSTC Financial Services Limited
|Rating class||Review||Rating scale||Rating class||Outlook||Date|
|Long Term issuer||Initial||National||BBB-(NG)||Stable||June 2011|
|Short Term issuer||Initial||National||A3(NG)||June 2011|
|Long Term issuer||Last||National||BBB-(NG)||Watch||October 2020|
|Short Term issuer||Last||National||A3(NG)||October 2020|
Risk Score Summary
|Rating Components & Factors||Risk scores|
|Country risk score||3.75|
|Sector risk score||2.50|
|Management and governance||0.00|
|Capital and Leverage||2.75|
|Funding and Liquidity||(1.25)|
|Balance Sheet||Also known as Statement of Financial Position. A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been financed.|
|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.|
|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. In insurance, it refers to an individual or company’s vulnerability to various risks|
|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 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; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The credit rating has been disclosed to WSTC Financial Services Limited. The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating.
WSTC Financial Services Limited participated in the rating process via telephonic 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 WSTC Financial Services Limited and other reliable third parties to accord the credit ratings included:
- Audited financial results as at 31 December 2019
- Three years of comparative audited numbers
- Audited financial results as at 30 September 2020
- Other related documents.