Announcements Financial Institutions Rating Alerts

GCR downgrades Finbond Group Limited’s national and international issuer credit ratings to BB-(ZA)/B(ZA) and B- respectively, balancing a strong operating environment with weak capital and leverage.

Rating Action

Johannesburg, 25 August 2021 – GCR Ratings (“GCR”) has downgraded the South African long and short-term issuer ratings of Finbond Group Limited to BB-(ZA)/B(ZA) respectively. The outlook is Evolving. At the same time, the international scale long-term rating has been downgraded to B-. The outlook is Negative.

Rated Entity / Issue Rating class Rating scale Rating Outlook / Watch
Finbond Group Limited Issuer Long Term National BB-(ZA) Evolving Outlook
Issuer Short Term National B(ZA)
Issuer Long Term International B- Negative Outlook

Rating Rationale

The ratings on Finbond balances the relative strengths and weaknesses of the North American and South African operations, weaker pandemic affected earnings, low levels of leverage and capitalisation, an improved funding structure, robust liquidity, weak risk position and competitive position. The outlook on the national scale ratings reflects the earnings uncertainty and its effect on leverage.

Finbond’s competitive position remains a weakness to the rating. The group is primarily a lender of short-term unsecured consumer loans and has a relatively small retail franchise in comparison to big commercial banks, although the group also offer a growing number of secured consumer loans and secured small business loans through its subsidiaries and associates. Albeit geographically diversified, the group’s operations are significantly smaller, less diverse (by product and business lines) than banking sector peers in the relative markets. The group has a good track record of revenue stability which has been bolstered in recent years on the back of growing international operations. During the pandemic, South African operations has showed a degree of resilience, however North American operations were severely impacted by social grants that caused large scale prepayments and lower product demand. Projected uptake of these short-term loans should resume towards the end of the calendar year given product seasonality as well as the reduction of savings that was built-up from social grants as North American states stopped grant payments in June and July 2021.

Our negative assessment of management and governance has been moderated slightly to reflect management stability over the past two years, albeit still thinly spread which may pose contingency risk. The entrepreneurial owner management which is evident within the group and remains the key factor underpinning the slightly negative score.

The group’s capitalisation has weakened, reflected in the GCR leverage ratio of c.2.6% as at FY21. This is largely attributable to owners’ equity that decreased by 30% to R1.02 billion (FY 2020: R1.45 billion) due to lower loan volumes (caused by the pandemic) that resulted in losses, as well as share buy-backs, in the year ending FY21. Loan loss reserve coverage of 158% at FY21 is considered adequate albeit slightly down from 175% at FY20. Earnings have been robust in FY19 and is expected to rebound especially when North American lending resumes to previous levels.

Finbond Mutual Bank’s (a South African subsidiary of the Group) Capital Adequacy Ratio was reported in excess of 40% (15% in excess of regulatory requirements) at February 2021. The Group however is primarily a short-term unsecured consumer lender and not subject to Basel III (as would be the case for a bank), thus capital is managed on a debt/equity basis at group level with a target range of 1.0-2.0x. The debt/equity ratio was 2.1x at FY21 (1.4x at FY20), which GCR considers to be weak. The group’s return on assets has also deteriorated to -5.6% from 5.4% over the same period due to low loan volumes and resultant losses in the current pandemic environment.

The group’s risk position is weak, reflected by the high cost of risk of 32% at FY21 and FY20. This is due to the nature of unsecured consumer lending and modest recoveries. Reserving has been declining slightly. Loan concentrations are however very low reflected by an average loan size of below R1,905 in South Africa and USD380 in North America at FY21. The recent change of consumer finance laws in the State of Illinois (North America) that considers all new loans in excess of 36% Annual Percentage Rate to be null and void is of concern to GCR given that 26.9% of the group’s revenue was generated from Illinois. The group does however have several strategies to limit the impact on earnings.

The group is predominantly funded by equity, term deposits and commercial paper, which GCR considers stable funding sources. Robust levels of liquidity is supported by the very short term loan book (c.3 months) registering high collections rates of 95%. The collection rates and reduced disbursements have resulted in a significant portion of the loan book being convert to cash and cash equivalents, which due to their classification on the balance sheet were not added back in calculating the GCR leverage ratio.

Outlook Statement

The group has robust levels of liquidity and we view this to sustain throughout the rating horizon. However, the outlook is evolving which reflect the continued negative impact from the strained operating environment. Particularly lower loan origination in North America and the consequential impact on earnings will have sustained pressure on the GCR leverage.

Rating Triggers

A downgrade in the group’s credit profile could stem from a weakening South African operating environment and a further reduction of capitalisation. Upside rating migration is limited, however a sustained improvement in credit losses and improved capitalisation would improve the ratings.

Analytical Contacts

Primary analyst Corné Els Senior Financial Institutions Analyst
Johannesburg, ZA CorneE@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 Rating Scales, Symbols & Definitions, May 2019
GCR Country Risk Scores, July 2021
GCR Financial Institutions Sector Risk Score, June 2021

Ratings History

Finbond Group Limited

Rating class Review Rating scale Rating class Outlook Date
Long Term issuer Initial National BB(ZA) Stable October 2011
Last National BBB(ZA) Negative July 2020
Initial International BB-(ZA) Stable October 2013
Last International B(ZA) Negative July 2020
Short Term issuer Initial National B(ZA) n.a October 2012
Last National A3(ZA) n.a July 2020

Risk score summary

Rating Components & Factors Risk scores
Operating environment 17.50
Country risk score 12.00
Sector risk score 5.50
Business profile (5.25)
Competitive position (5.00)
Management and governance (0.25)
Financial profile (4.00)
Capital and Leverage (1.50)
Risk (4.50)
Funding and Liquidity 2.00
Comparative profile 0.00
Group support 0.00
Government support 0.00
Peer analysis 0.00
Total Score 8.25

Glossary

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 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 the rated entity.

The ratings of the following entities were solicited by, or on behalf of, the rated entities, and therefore, GCR has been compensated for the provision of the ratings.

Finbond Group Limited participated in the rating process via teleconference 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 the entities and other reliable third parties to accord the credit ratings included:

  • Audited financial results as at 28 February 2021;
  • 30 June 2021 Management Accounts;
  • ALCO and Exco Packs; and
  • Other relevant information.
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