Johannesburg, 12 April 2017 – Global Credit Ratings has downgraded the long term national scale rating of Iemas Financial Services (Co-operative) Limited to BBB+(ZA) and affirmed the short term national scale rating of A2(ZA); with the outlook accorded as Negative. Furthermore, Global Credit Ratings has affirmed the international scale long-term local currency rating assigned to Iemas Financial Services (Co-operative) Limited of BB; with the outlook accorded as Negative.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating(s) to Iemas Financial Services (Co-operative) Limited (“Iemas”, “the co-operative”) based on the following key criteria:
The current ratings level factors in Iemas’ long history and established lending platform, operating within its traditional business of consumer credit (including ancillary insurance and card products) for its members at large established institutions (employer groups) through contractual relationships and payroll based collection mechanisms, appropriate risk management systems and adequate capitalisation. The ratings exclude the prospect of state support.
Capital and reserves grew by 10.3% to R1.4bn at FY16 (FY15: 14.6%) driven by retained earnings. Consequently, the capital/assets ratio increased to a review period high of 29.8% at FY16 (FY15: 24.3%). Covenants stipulated by lenders (banks and capital markets) also require the co-operative to maintain a capital and reserves balance plus member’s funds of above R1.5bn. Member funds totalled R770.8m at FY16 (FY15: R746.5m).
As a consequence of the weakened economic environment, interest rates hikes, consumer affordability constraints, poor employment prospects, high indebtedness levels, and the co-operative’s subsequent reduced risk appetite, asset quality remained under pressure in the period under review with loan growth significantly curtailed. Furthermore, the co-operative has significant exposures to the mining (39.5%), steel manufacturing (8.9%) and petrochemicals (10.0%) sectors that have been hit hard by the fall in commodity prices, rising redundancies, labour unrest and shorter work weeks. In response, management has tightened lending criteria, stepped up collection and recovery efforts, and committed to diversify the loan book by targeting lending to employer groups in less susceptible sectors.
Total gross non-performing loans (“NPLs”) amounted to 6.3% of gross loans at FY16 (FY15: 5.2%), with the ratio partly exacerbated by limited loan issuance in FY16 (gross loans shrank by 9.9%). Specific provisions covered 27.2% of gross NPLs at FY16 (FY15: 26.3%), pre-collateral. Unreserved impaired loans (net NPLs) amounted to 14.9% of capital at FY16 (FY15: 15.1%). Cognisance is taken of the large amount of collateral held against NPLs, with the bulk of the loans in the form of vehicle finance (56.0%) and pension backed loans (26.7%), although collateral is vulnerable to valuation changes. Unsecured loans constituted 17.3% of the book at FY16, down from 18.7% at FY15.
Iemas posted a pre-tax profit of R165.9m for FY16, down 18.4% from the previous period (FY15: 2.0% increase). Earnings growth was impacted by the smaller size loan book despite relatively stable margins and higher impairment charges. The ability to service debt remained satisfactory with the co-operative posting an interest coverage ratio of 2.1x in FY16 (FY15: 2.4x) against a covenant minimum of 1.5x. Overall, the ROaE and ROaA for FY16 decreased to 15.4% (FY15: 21.3%), and 4.0% (FY15: 4.5%) respectively.
Given the negative outlooks, a ratings upgrade is unlikely in the short/medium term. Improved asset quality trends driven by low credit losses and sound underwriting, steady operating (capital, liquidity and earnings) metrics through the economic cycle, as well as a significant increase in operational scale, would help strengthen Iemas’ financial profile, and stabilise ratings at current levels. However, sustained negative trends in asset quality and profitability, and a loss of scale in the business, could see the ratings come under pressure. Furthermore, the international scale rating will be sensitive to changes in the sovereign rating of the country.
|NATIONAL SCALE RATINGS HISTORY||INTERNATIONAL SCALE RATING HISTORY|
|Initial rating (July 2014)||Initial rating (July 2014)|
|Long-term: A-(ZA); Short-term: A2(ZA)||Long-term: BB+|
|Outlook: Stable||Outlook: Stable|
|Last rating (December 2016)||Last rating (December 2016)|
|Long-term: A-(ZA); Short-term: A2(ZA)||Long term: BB|
|Outlook: Negative||Outlook: Negative|
|Jennifer Mwerenga||Omega Collocott|
|Senior Analyst||Sector Head: Financial Institution Ratings|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2017
Global Criteria for Rating Finance and Leasing Companies, updated March 2017
Iemas Rating Reports (2014-16)
RATING LIMITATIONS AND DISCLAIMERS
ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.NET/RATINGS-INFO. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.NET.
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.
Iemas Financial Services (Co-operative) Limited participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit ratings have been disclosed to Iemas Financial Services (Co-operative) Limited with no contestation of the rating.
The information received from Iemas Financial Services (Co-operative) Limited and other reliable third parties to accord the credit ratings included:
- Audited financial results of Iemas Financial Services (Co-operative) Limited to 31 August 2016 (plus four years of comparative numbers);
- Interim financial results of Iemas Financial Services (Co-operative) Limited to 28 February 2017;
- Latest internal and/or external audit reports to management;
- A breakdown of facilities available and related counterparties;
- Reserving methodologies and capital management policy;
- Industry comparative data and regulatory framework; and
- Corporate governance and enterprise risk frameworks.
The ratings above were solicited by, or on behalf of, Iemas Financial Services (Co-operative) Limited, and therefore, GCR has been compensated for the provision of the ratings.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S FINANCIAL INSTITUTIONS GLOSSARY
|Asset||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|Asset Quality||Refers primarily to the credit quality of a bank’s earning assets, the bulk of which comprises its loan portfolio, but will also include its investment portfolio as well as off balance sheet items. Quality in this context means the degree to which the loans that the bank has extended are performing (ie, being paid back in accordance with their terms) and the likelihood that they will continue to perform.|
|Capital||The sum of money that is invested to generate proceeds.|
|Collateral||Asset provided to a creditor as security for a loan.|
|Covenant||A provision that is indicative of performance. Covenants are either positive or negative. Positive covenants are activities that the borrower commits to, typically in its normal course of business. Negative covenants are certain limits and restrictions on the borrowers’ activities.|
|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.|
|Downgrade||The assignment of a lower credit rating to a company or sovereign borrower’s debt by a credit rating agency. Opposite of upgrade.|
|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.|
|Impairment||Reduction in the value of an asset because the asset is no longer expected to generate the same benefits, as determined by the company through periodic assessments.|
|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.|
|Interest Rate||The charge or the return on an asset or debt expressed as a percentage of the price or size of the asset or debt. It is usually expressed on an annual basis.|
|International Scale Rating LC||International local currency (International LC) ratings measure the likelihood of repayment in the currency of the jurisdiction in which the issuer is domiciled. Therefore, the rating does not take into account the possibility that it will not be able to convert local currency into foreign currency or make transfers between sovereign jurisdictions.|
|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||Not current; ordinarily more than one year.|
|Long-Term Rating||Reflects an issuer’s ability to meet its financial obligations over the following three to five year period, including interest payments and debt redemptions. This encompasses an evaluation of the organisation’s current financial position, as well as how the position may change in the future with regard to meeting longer term financial obligations.|
|Margin||The rate taken by the lender over the cost of funds, which effectively represents the entity’s profit and remuneration for taking the risk of the loan; also known as spread.|
|National Scale Rating||Provides a relative measure of creditworthiness for rated entities only within the country concerned. Under this rating scale, a ‘AAA’ long term national scale rating will typically be assigned to the lowest relative risk within that country, which in most cases will be the sovereign state.|
|Performing Loan||A loan is said to be performing if the borrower is paying the interest on it on a timely basis.|
|Provision||The amount set aside or deducted from operating income to cover expected or identified loan losses.|
|Retained Earnings||Earnings not paid out as dividends by a company. Retained earnings are typically reinvested back into the business and are an important component of shareholders’ equity.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Risk Management||Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy.|
|Short-Term||Current; ordinarily less than one year.|
|Short-Term Rating||An opinion of an issuer’s ability to meet all financial obligations over the upcoming 12 month period, including interest payments and debt redemptions.|
|Under Review||Failure to carry out a full review of a rated entity within the designated timeframe, either through lack of information or delays in finalisation, i.e. review is ongoing.|
For a detailed glossary of terms please click here
GCR downgrades Iemas Financial Services (Co-operative) Limited’s rating to BBB+(ZA); Outlook Negative.