Johannesburg, 16 September 2020 – GCR Ratings (“GCR”) has assigned Letshego Bank Namibia Limited national scale long term and short term issuer ratings of A(NA) and A1(NA) respectively, with a Stable Outlook.
|Rated Entity||Rating class||Rating scale||Rating||Outlook/Watch|
|Letshego Bank Namibia Limited||Long Term issuer||National||A(NA)||Stable Outlook|
|Short Term issuer||National||A1(NA)|
Letshego Bank Namibia Limited (“LBN”, “the bank”) is considered a core operating entity in Letshego Holdings Namibia Limited (“LHN”, “the Group”), as such, the national scale issuer ratings on the bank reflect the strengths and weakness of the wider LHN Group.
The ratings are restrained by the relatively weaker business profile in comparison to domestic commercial banks characterised by its small size, moderately high cost of funding and relative lack of diversity. The ratings benefit from good levels of liquidity and capitalisation, offset by relatively weaker asset quality and a concentrated wholesale funding structure.
The business profile is a ratings negative. The Group has significantly smaller and less diverse operations (by product and business lines) than the large domestic banks operating in Namibia. This weakness is partly offset by strengths within its chosen niche characterised by a high market share in deduction at source (“DAS”) of approximately 48%. The bank is currently leveraging on synergies with its sister company Letshego Micro Financial Services Namibia (Pty) Limited (“LMFSN to facilitate migration of DAS clients to banking customers. Whilst, diversification efforts outside DAS lending is strategically appropriate, it is also expected to be hard, given high barriers to entry and competition with larger more established commercial banks. Namibia’s financial sector is dominated by four large and heterogeneous financial conglomerates, all with close ownership and funding links to South Africa.
Positively, capitalisation is strong, as shown by a very high GCR capital ratio of 76% at 30 June 2020 (FY19: 95%), which we expect to range 65% to 70% over the next 12 to 18 months. Earnings are supportive of strong capitalisation, although over the next 12 to 18 months profitability will largely depend on how the Group manages potentially higher credit losses and funding new / additional product projects. While reserving is considered low in relation to rated peer banks, the Group enjoys insurance post default recovery cover with strong insurers and inherently collateralised loan book. However, DAS loans originated without insurance / deductions cover expose the Group to potential increase in cost of risk with a negative impact on earnings over the longer-term.
The risk profile is a slight negative ratings factor. While the credit losses are broadly in line with top tier banks, product (DAS) and sectorial (public sector) concentration risk is very high. Furthermore, the group is exposed to high regulatory and strategic risk if LMFSN fails to renew its license from the regulator. If the licence is not renewed or the Group fails to successfully originate new DAS loans under LBN, revenues are likely to drop, unless the Group can migrate existing customers into riskier non-payroll loans. In which case, non-performing loans (“NPLs”) and credit losses will likely increase. In addition, the challenging operating environment and the impact of COVID-19, imply further pressure on NPLs and provisioning needs. GCR anticipates a moderate rise in the cost of risk over the medium to long term consistent with sector wide expectations and the aforementioned risks.
LHN’s funding is relatively concentrated and expensive in comparison to banking peers in Namibia. Cost of funding was moderately high, around 5.9% at 30 June 2020 and 4.9% at 31 December 2019. To lower the cost of funds, the bank intends to improve the stable funding base in the form of customer deposits to reduce reliance on funding from capital and wholesale funds. However, liability funding concentration risk is still high, two bank facilities contributed 87% to the total liability funding base (FY18: 63%). The reliance on concentrated wholesale funding, particularly the reliance on bank loans, does somewhat weaken funding stability and the ability of the bank to generate more business. Positively, the structural funding risks are countered by good liquidity management reflecting the positive asset / liability mismatch and the adequate liquid asset coverage of short-term wholesale funding of 0.5x at 30 June 2020.
The issuer ratings benefit from parental support. LHN is wholly owned by Letshego Holdings Limited which is headquartered and listed in Botswana, delivering finance solutions to populations across 11 Sub-Saharan markets. Though not a material asset or revenue contributor, there is evidence of support from and assimilation with the parent. We believe the Letshego Group has the capacity to support the Group and bank based on its sound financial profile and good geographic diversification.
The outlook is stable, balancing the strain of the operating environment with a sound financial profile. We expect a strong GCR capital ratio for the next two years balancing its very solid position, with solid internal capital generation and higher provision requirements. We anticipate the cost of risk to rise to a still solid 1%, due to operating volatility, elevated asset quality risk and product concentration risk. We also factor in adequate liquidity supported by renewable facilities and shareholder support.
There is limited upside potential over the outlook horizon, given the strained operating environment. However, we could raise the ratings if the regulator approves the DAS license in the short to medium term, if LHN raises and maintains a more diversified long-term funding structure or if over the longer-term there is an improvement in the business diversification without a deterioration in asset quality. A downgrade could be caused by higher than anticipated credit losses and weaker funding profile.
|Primary analyst||Vimbai Muhwati||Financial Institutions Analyst|
|Johannesburg, ZA||VimbaiM@GCRratings.com||+27 11 784 1771|
|Committee chair||Corné Els||Senior Structured Finance & Securitisation Analyst|
|Johannesburg, ZA||CorneE@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 Scales, Symbols & Definitions, May 2019|
|GCR Country Risk Scores, May 2020|
|GCR Financial Institutions Sector Risk Score, August 2020|
Letshego Bank Namibia Limited
|Rating class||Review||Rating scale||Rating||Outlook/Watch||Date|
|Long Term issuer||Initial/last||National||A(NA)||Stable Outlook||September 2020|
|Short Term issuer||Initial/last||National||A1(NA)||September 2020|
Risk Score Summary
|Rating Components & Factors||Risk Scores|
|Country risk score||5.50|
|Sector risk score||5.50|
|Management and governance||0.00|
|Capital and Leverage||4.00|
|Funding and Liquidity||0.00|
|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 RATING
GCR affirms that a.) no part of the rating process was 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 ratings have been disclosed to Letshego Bank Namibia 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 ratings.
Letshego Bank Namibia Limited participated in the rating process via video conference 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 Letshego Bank Namibia Limited and other reliable third parties to accord the credit ratings included:
- The audited financial results to 31 December 2019
- Unaudited interim results as at 30 June 2020
- Breakdown of facilities
- Other related documents.