11 March 2021 – GCR Ratings (“GCR”) has assigned national scale long and short-term issuer ratings to Johannesburg based National Housing Finance Corporation SOC Limited (“NHFC”) of A(ZA)/A1(ZA), with a Stable Outlook. At the same time, GCR has assigned international scale long and short-term issuer ratings to NHFC of B+/ B, also with a Stable Outlook.
|Rated Entity||Rating class||Rating scale||Rating||Outlook/Watch|
|National Housing Finance Corporation SOC Limited||Long Term Issuer||National||A(ZA)||Stable Outlook|
|Short Term Issuer||National||A1(ZA)|
|Long term Issuer||International||B+||Stable Outlook|
|Short term Issuer||International||B|
The ratings of NHFC balance very strong capital and liquidity with a weak risk profile characterised by deteriorating asset quality and constrained competitive positioning. Despite the challenges arising from the transition to a consolidated entity (consolidated group will eventually become Human Settlements Development Bank (“HSDB”)), including formalisation of group wide risk management, key internal operating policies and integration of the consolidated entities, GCR views NHFC’s solid balance sheet to be a key rating strength which is expected to provide adequate loss absorption capacity amidst a deteriorating operating environment. The latter is likely to exert severe pressure on asset quality given the vulnerability of the target market to economic stress with the situation being compounded by the continued impact of the COVID-19 pandemic.
NHFC is a Developmental Financial Institution (“DFI”) that was setup to broaden and deepen access to the financing and development of sustainable Human Settlements in the low to middle income segment of the South African household market and therefore, has a protected role within its operating sphere. The 100% government ownership and limited number of peers servicing the target market gives added credence to its critical status within the respective government portfolio. Nonetheless, NHFC’s competitive positioning is quite limited given this narrow focus. The lack of scale of the loan book (1H FY21: gross loans of c.R2.8bn) and limited track record in achieving mandates on a consistent basis also attests to the lack of penetration in the target market (which according to management is roughly around 7m individuals) and challenges with the current distribution model (where funds are distributed primarily through intermediaries). It remains to be seen whether the transition to HSDB (subject to parliamentary approvals) will result in a more cohesive strategy for the consolidated group and ultimately, increased loan growth and target market penetration. In GCR’s view, the consolidated entity’s competitive profile is likely to remain a rating constraint due to expected challenges in executing the planned growth strategy, including integration of staff into the consolidated group and bedding down of key internal policies and frameworks (such as credit and Information Technology) that will be essential in gearing up the entity to meet longer term objectives.
Capital and leverage is a key rating strength, with the GCR leverage ratio expected to register at very strong levels above 80% over the next 12 – 18 months. Good historical internal capital generation and subdued loan growth has provided ample loss absorption capacity relative to the underlying risk exposures. In GCR’s view, NHFC’s earnings may come under pressure over the coming years should borrowings rise, due to much higher credit costs, lower interest rate environment and heightened volatility in equity-type linked returns. GCR expects the medium-term ROA to hover around 0.6% but an anticipated R2bn capital injection by the shareholder and moderate loan growth should provide good headroom to potential earnings headwinds.
The overall risk position is viewed to be weak, underpinned by deteriorating asset quality and comparatively higher levels of operational risk that could undermine medium-long term strategic execution. Asset quality is particularly weak with Non-performing loans (“NPLs”) forecast to rise to a very high 62% in FY21 before moderating to a high 39% in FY22, based on GCR’s expectations. Credit losses are also expected to register above 2.6% in the next 12-18 months, a function of the weak operating environment, compounded by the COVID-19 pandemic which is likely to severely impact repayment capacity of intermediary partners, given the higher level of vulnerability to economic stress of the ultimate beneficiaries.
In addition to this, the consolidation of NHFC has given rise to multiple challenges that is viewed to have increased operational risk. These pertain to the integration of staff into the combined entity structure and revising key internal credit and IT policies. Currently, there is a high reliance on manual processes in the operating model which GCR believes heightens data management risk and hinders operating process efficiency. There are plans to address some of these issues, but it may take up to two years for appropriate systems to be fully embedded into the organisation.
As part of the business model, NHFC provides equity/quasi equity/junior debt/sub debt funding to entities operating in the target sectors. In GCR’s view, these equity-type investments carry higher levels of credit risk which may necessitate future impairments or fair value adjustments, thereby increasing balance sheet risk. As such, the overall risk position is unlikely to improve materially over the rating horizon in view of the factors highlighted above.
NHFC is not a deposit taking institution and so, is wholly reliant on external funding, typically in the form of loans from other DFI’s and grant funding from its shareholder. In this context, NHFC’s funding is viewed to be adequate, with a fairly long-term maturity profile and low levels of gearing as indicated by a high expected GCR stable funding ratio above 125% over the next year and a half. GCR notes that there was a breach of financial covenants on two loans in 2019/2020, but these have since been resolved with one loan being repaid and new loan covenants being agreed on the other. Furthermore, this risk is mitigated by the very strong liquidity profile with liquid assets expected to cover wholesale funding by c.4x over the medium term. GCR’s base case scenario assumes modest loan growth over the next two years and while management are expecting a higher rate of disbursements, the potential recapitalisation (c.R2bn) should mitigate the risk of significant liquidity strain with funding and liquidity projected to remain very strong in GCR’s view.
Whilst NHFC would qualify for a degree of government support, this will only be factored in when the risk of the entity goes below the operating environment score. See the Criteria for the GCR Ratings Framework for more details.
The ratings of NHFC are based on the credit profile of the consolidated entity, which includes NHFC. GCR adjusts the group numbers to exclude the investment in Housing Investment Partners (Pty) Limited (“HIP”), for analytical reasons. Based on information provided by management, HIP is viewed to be a ring-fenced entity, with NHFC’s financial obligations being limited to the carrying value of its R341m investment (in the form of sub-ordinated debt). GCR has excluded HIP’s obligations from the consolidated group results and applied the standard adjustment to capital for investments in associates. NHFC is the core entity within the group, accounting for 77% of assets as at FY20. Accordingly, the ratings of NHFC are equalised to that of the group Anchor Credit Evaluator (“ACE”).
The Stable outlook is based on the strong loss absorption buffers currently in place that is expected to support the current credit profile over the outlook horizon. Given the 100% government shareholding, downward rating pressure is limited as GCR would factor in government support should the standalone rating fall below the current rating level, as determined by the applicable operating environment score. In addition to this, the high likelihood of additional capital support in the near term is expected to further solidify the balance sheet position and adequately cater for negative earnings pressure and higher than anticipated loan growth. GCR also notes the ongoing transition process, which is likely to be concluded in 2021, but the impact thereof has been catered for in the current credit profile.
Over the short to medium term, upward rating movement could emanate from a sustainable improvement in earnings, coupled with the successful implementation of key risk management policies and frameworks that would address the currently high levels of operational risk. Over the longer term, upward rating movement could stem from the entity consistently meeting strategic objectives set out in the company’s mandate, all while maintaining the current levels of capital and liquidity strength. Given the 100% government shareholding, downward rating pressure on the national scale ratings are limited as GCR would factor in government support should the standalone rating fall below the current rating level, as determined by the applicable operating environment score.
|Primary analyst||Vinay Nagar||Senior Financial Institutions Analyst|
|Johannesburg, ZA||Vinay@GCRratings.com||+27 11 784 1771|
|Committee chair||Matthew Pirnie||Group Head of Ratings|
|Johannesburg, ZA||MatthewP@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 Country Risk Scores, February 2021|
|GCR Financial Institutions Sector Risk Scores, February 2021|
National Housing Finance Corporation SOC Limited
|Rating class||Review||Rating scale||Rating||Outlook||Date|
|Long Term Issuer||Initial||National||AA-(ZA)||Stable||February 2004|
|Short Term Issuer||Initial||National||A1+(ZA)||N/a||February 2004|
*The ratings were affirmed and subsequently withdrawn for analytical reasons in November 2019, but ratings coverage resumed towards the end of 2020 and GCR has opted to reflect the historical ratings of the entity.
Risk Score Summary
|Rating Components & Factors||Risk scores|
|Country risk score||7.00|
|Sector risk score||5.75|
|Management and governance||0.00|
|Capital and Leverage||4.00|
|Funding and Liquidity||1.50|
|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 ratings have been disclosed to National Housing Finance Corporation SOC Limited. The ratings above were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings.
National Housing Finance Corporation SOC Limited participated in the rating process via telephonic discussions and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information used to analyse and accord the credit ratings included:
- Audited financial results as at 31 March 2020 (and four years of comparative numbers);
- Unaudited management accounts to 31 December 2020;
- Other relevant information; and
- Industry comparative data;
The ratings were affirmed and subsequently withdrawn for analytical reasons in November 2019, but ratings coverage resumed towards the end of 2020 and GCR has opted to reflect the historical ratings of the entity above.