Lagos Nigeria, 14 October 2019–Global Credit Ratings has affirmed the national scale ratings assigned to WSTC Financial Services Limited of BBB-(NG) and A3(NG) in the long term and short term respectively; with the outlook accorded as Stable. These ratings are valid until August 2020.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to WSTC Financial Services Limited (“WSTC” or “the company”) based on the following key criteria:
The ratings take into consideration, the volatility in WSTC Financial Services Limited’s (“WSTC” or “the company”) financial performance over the last five years of review, amidst a strong capitalisation, liquidity and asset quality metrics. Also, cognisance is taken of the acceptability and popularity of the brand in the financial services industry.
Capitalisation is considered strong for its current operational scale. Shareholders’ funds grew by 16.1% to N2.0bn at FY18, on the back of its internal capital generating capacity. Although capital adequacy ratio (“CAR”) reduced to 79.2% at FY18 (FY17: 102.9%) mainly due to increase in risk weighted assets, the ratio remained well above the required minimum of 12.5% for the subsector. The CAR remained within similar range at 79.7% at 1H FY19 and it is expected to remain strong over the short to medium term.
Asset quality metrics is considered sound, as non-performing loans (“NPLs”) remained as nil for most of the review period.
Liquidity risk is considered minimal, given the company’s conservative approach to asset allocation and risk asset creation. A sizeable 68% of WSTC’s total asset at FY18 were in cash and risk-free government securities. However, cognisance is taken of a liquidity gap of N1.3bn in the ‘less than one month’ maturity matching of asset and liabilities on contractual basis. Behaviourally, most of the borrowings are expected to be rolled over at maturity.
Year-on-year profitability metrics reduced in FY18, underpinned by decline in non-interest income. While net interest income improved by 16.8% in FY18, a significant 44.1% decline in non-interest income saw total operating income closed lower by 7.0% from that of FY17. Non-interest income recorded a one-off spike in FY16, on the back of foreign exchange (FX) revaluation gain, and the FX gains have continued to moderate over the last two years, as it reduced significantly to a negligible N1.8m in FY18 (FY17: N107.1m, FY16: N222.9m). Operating expenses grew by 4.9%, resulting in a cost to income ratio of 63.4% (FY17: 56.2%) and a pre-tax profit of N215m, representing 21.6% decline from the previous year. As such, return on average equity and assets (“ROaE” and “ROaA”) reduced to 9.4% (FY17: 14.1%) and 2.7% (FY17: 4.5%) in FY18.
Performance as at 1H FY19 reflects an improvement in pre-tax profit when compared to corresponding period in FY18 but measured slightly below budget for the year on annualised basis.
The ratings could improve following a significant and sustained higher profitability level. In addition, ability to maintain asset quality metrics at sound level while growing the loan book may be positively considered. However, a significant decline in asset quality and /or liquidity position, due to expansion risk asset may result in a downward review of the rating.
NATIONAL SCALE RATINGS HISTORY
Initial rating (June 2011)
Long term: BBB-(NG); Short term: A3(NG)
Last rating (August 2018)
Long term: BBB-(NG); Short term: A3(NG)
Senior Credit Analyst
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APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2017
Criteria for Rating Finance and Leasing Companies, updated March 2017
WSTC rating reports (2011-18)
Glossary of Terms/Ratios (February 2016)
RATING LIMITATIONS AND DISCLAIMERS
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.
The ratings were solicited by, or on behalf of, WSTC Financial Services Limited, and therefore, GCR has been compensated for the provision of the ratings.
WSTC Financial Services 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 WSTC Financial Services Limited with no contestation of/changes to the ratings.
The information received from WSTC Financial Services Limited and other reliable third parties to accord the credit ratings included the latest audited annual financial statements at 31 December 2018 (plus four years of comparative numbers), latest internal and/or external auditor’s report to management, full year detailed budget for 2019, and most recent management accounts to 30 June 2019. In addition, information specific to the rated entity and/or industry was also received.