Announcements

GCR upgrades Finbond Group Limited’s rating to BBB-(ZA); Outlook Stable.

Johannesburg, 30 October 2014 — Global Credit Ratings has today upgraded Finbond Group Limited’s national scale long term rating to BBB-(ZA) and affirmed the national scale short term rating of A3(ZA), with the outlook accorded as Stable. Furthermore, GCR has affirmed the international scale rating accorded to Finbond Group Limited of BB; with the outlook accorded as Stable.

SUMMARY RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit rating(s) to Finbond Group Limited (“Finbond”, “the group”) based on the following key criteria:

Finbond’s growing franchise as a leading player in mutual banking and short-term microfinance, providing short- and medium-term credit, insurance and savings products through its 281 branches. Adequate capital, conservative credit/risk management, and improving profitability/earnings diversification (despite regulatory risk) support the ratings, which exclude the prospect of systemic support, given its low likelihood. The rating outlooks consider Finbond’s prospects/strategic direction, within the context of the negative consumer health, debt affordability, and credit trends.

High liquidity levels (46.1% of assets) and adequate capitalisation (Finbond Mutual Bank’s capital adequacy ratio was 34% at 1H F15) support the moderate credit appetite. The loan/deposit ratio fell from 65.2% (FYE13) to 30.3% (FYE14).

Asset quality stability was noted, despite F14 advances growth of 69.6% (1H F15: 23.5%). As c.80% of loans issued are short-term, traditional asset quality measures may overstate bad debt experience. Gross/net impairment ratios (impairments – instalments in arrears) declined to 20.1%/13.1% at 1H F15 (FYE13: 23.9%/15.6%). Net impairments vs. instalments due (management’s key measure) fell from 6.3% (FYE14) to 5.8% (1H F15). Over the same period, collection rates remained strong, loan rejection rates rose, and arrears levels/roll-rates were stable. Provisioning appeared adequate, but close monitoring is required given the challenging market conditions.

In F14, operating income rose by 34.4% to R236.1m (net income – 78.3% to R36.9m). Despite 22.0% cost growth in F14 driven by loan volumes and risk systems/infrastructure enhancement, the cost to income ratio declined to 69.6% (F13: 76.7%). Impairment costs grew 25.8% in F14 and 90.0% in 1H F15, highlighting a lagged effect of loan book size and term extension.

The group’s prospects are subject to forecast risk given negative market trends. The focus on short-term loans reduces dependency on advances growth as a business driver, but the potential for regulatory caps could crimp future microlending margins. Revenue diversification strategies, including transactional banking, while positively viewed, are in a nascent phase, and may raise costs. Finbond appears well placed to develop its business profitably and conservatively, despite the challenging operating environment.

A sustained improvement in business profile, asset quality, capital and earnings would be positively considered from a ratings perspective. The ratings would be sensitive to weakening in asset quality indicators or long-term earnings prospects (affected by the uncertain economic/regulatory environments), and a material decline in capital from current levels.

NATIONAL SCALE RATINGS HISTORY INTERNATIONAL SCALE RATINGS HISTORY
Initial rating (Oct/2011) Initial rating (Oct/2013)
Long term: BB(ZA) Long term: BB-
Outlook: Stable Outlook: Stable
Last rating (Jul/2014) Last rating (Jul/2014)
Long term: BB+(ZA); Short term: A3(ZA) Long term: BB
Outlook: Stable Outlook: Negative

ANALYTICAL CONTACTS

Primary Analyst
Omega Collocott
Head: Financial Institution Ratings
(011) 784-1771
Omegac@globalratings.net

Committee Chairperson
Eyal Shevel
Head: Corporate Ratings
(011) 784-1771
shevel@globalratings.net

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Banking Criteria, updated April 2014
Microfinance Institutions Criteria, updated April 2014
Finbond rating reports (up to 2013)

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.

Finbond Group 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 rating/s has been disclosed to Finbond Group Limited with no contestation of the rating.

The information received from Finbond Group Limited and other reliable third parties to accord the credit rating included the audited annual financial statements at 28 February 2014 (plus four years of comparative numbers), interim financial statements for the six months ended 31 August 2014, latest internal and/or external report to management, full year detailed budgeted financial statements, management accounts to 31 August 2014, corporate governance and enterprise risk framework, reserving methodologies, capital management policy, industry comparative data (including consumer lending information to 2Q 2014 as supplied by the NCR), and a breakdown of facilities available and related counterparties.

The ratings above were solicited by, or on behalf of, Finbond Group 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 Quality

The ability of a bank’s assets, especially its loans, to continue to perform according to its terms and generate net interest income for the bank.

Bad Debt

All or portion of an account, loan, or note receivable considered to be uncollectible.

Capital Adequacy

A measure of the adequacy of an entity’s capital resources in relation to its current liabilities and also in relation to the risks associated with its assets. An appropriate level of capital adequacy ensures that the entity has sufficient capital to support its activities and that its net worth is sufficient to absorb adverse changes in the value of its assets without becoming insolvent.

Corporate Governance

The manner in which an entity is governed and decisions are undertaken.

Credit Rating Agency

A party that provides an opinion on the credit quality of assets, debt securities and companies.

Credit risk

Risk that a party to a contractual agreement or transaction will be unable to meet their obligations or will default on commitments. Credit risk can be associated with almost any transaction or instrument such as swaps, repos, CDs, foreign exchange transactions, etc. Specific types of credit risk include sovereign risk, country risk, legal or force.

Default

Failure to make loan payments on a timely basis or to comply with other terms/requirements as stipulated in the loan agreement.

Diversification

The principle that a portfolio in which assets are separated into different industry sectors, geographic regions and firms will embody less overall risk than one in which assets are concentrated into a few sectors, regions and firms.

Financial Institution

An entity that focuses on dealing with financial transactions, such as investments, loans and deposits.

Financial Statements

Presentation of financial data including balance sheets, income statements and statements of cash flow, or any supporting statement that is intended to communicate an entity’s financial position at a point in time and its results of operations for a period then ended.

Franchise

Business or banking franchise; a bank’s business.

Impairment

An amount set aside for expected losses to be incurred by a creditor.

Income Statement

Summary of the effect of revenues and expenses over a period of time.

Interim Financial Statements

Financial Statements that report the operations of an entity/business for less than one year.

Liquidity Risk

Liquidity is the ability to fund increases in assets and meet obligations as they become due, without incurring unacceptable losses.

Rating Outlook

A rating outlook indicates the potential direction of a rating over the medium term, typically a one to two year period.

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.

GCR upgrades Finbond Group Limited’s rating to BBB-(ZA); Outlook Stable.

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