Johannesburg, 31 October 2017 – Global Credit Ratings has upgraded the long term national scale rating of Finbond Group Limited to BBB(ZA) and affirmed Finbond Group Limited’s short term national scale rating of A3(ZA); with the outlook accorded as Stable. Furthermore, Global Credit Ratings has affirmed the long-term international scale local currency rating assigned to Finbond Group Limited of B+; with the outlook accorded as Negative.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Finbond Group Limited (“Finbond” or “the group”) based on the following key criteria:
The upgrade of Finbond’s long term rating stems from notably improved earnings diversification, following business acquisitions undertaken during FY17. Further rating support is derived from the group’s very strong capitalisation, low risk liquidity structure, as well as strong competitive position in a niche market of short term unsecured lending.
Finbond reflects notably improved earnings diversification, following the successful execution of the initial phase of its five year strategic plan, targeting local and offshore businesses with product ranges and customer bases in sync with the group’s existing core competencies. In terms of the latter, the group acquired eight short term and instalment lending companies operating in the United States of America (“USA”) and Canada in FY17. Finbond is expected to derive diversification benefits from the comparatively favourable risk profiles of the acquired credit portfolios, while enhanced geographic exposure is also viewed to diversify the group’s earnings base. Enhanced diversification is expected through the continued unfolding of the group’s medium term strategic expansion, supported by availability of resources and operational/technological innovation. Furthermore, the group remained committed to strengthening its local branch network, acquiring loan books of an additional 35 branches during FY17.
In FY17, pre-tax profit rose 194% to R279m on the strength of the growth-intensive USA businesses. The majority of profit was derived from Finbond’s growing microfinance transactional lines income. The cost/income ratio declined to 61.1% (FY16: 64.7%) in FY17, as efficiencies were obtained from economies of scale following the North American acquisitions. Overall, ROaE and ROaA strengthened to 18.2% and 4.4% respectively at FY17. Execution risk in maintaining the new portfolios’ profitability is viewed to be mitigated by the favourable historic performance of these books.
The group cemented a strong capital position in FY17. Finbond’s capital/assets ratio increased to 37.3% (FY16: 27.8%), supported by injection of share capital and Tier 2 qualifying subordinated shareholder loans. The group’s banking subsidiary Finbond Mutual Bank’s (“FMB”) had a capital adequacy ratio was 34.1% (FY16: 36.5%) at FY17, remaining above the regulatory minima of 25%.
Finbond’s credit portfolio expanded by 204% in FY17, while asset quality also improved on the strength of enhanced credit granting and collection criteria, coupled with the incorporation of the new portfolios into the group’s loan book. The group registered an improvement in its collection rates to 94% (FY16: 86%). The North American portfolio had an average collection rate of 96%. The arrears ratio (past due loans/gross advances) remained somewhat stable at 15.8% (FY16: 15.6%) at FY17, with the coverage ratio increasing to 58.4% (FY16: 49.1%) at FY17.
Finbond possesses a low risk liquidity structure due to positive asset/liability mismatches. The term structure of fixed deposits ranges between 6-72 months and indefinite term, while loans are cash-intensive with an average term of 3.7 months. Although Finbond as a mutual bank is not subject to Basel III requirements, FMB registered a net stable funding ratio of 488% in FY17, far exceeding the 100% required from 2018.
The recent positive rating action likely limits further upside rating potential over the short term. Medium term positive rating action may stem from continued enhancement of earnings and profit potential, while maintenance of strengthened asset quality and capital metrics may be positively considered. Negative rating action would likely follow a significant deterioration in asset quality, earnings, capital, funding and/or liquidity profiles.
|NATIONAL SCALE RATINGS HISTORY||INTERNATIONAL SCALE RATING HISTORY|
|Initial rating (October 2011)||Initial rating (October 2013)|
|Long-term: BB(ZA)||Long-term: BB-|
|Outlook: Stable||Outlook: Stable|
|Last rating (May 2017)||Last rating (May 2017)|
|Long-term: BBB-(ZA); Short-term: A3(ZA)||Long term: B+|
|Outlook: Stable||Outlook: Negative|
|Primary Analyst||Committee Chairperson|
|Simbarake Chimutanda||Kurt Boere|
|Credit Analyst||Senior Credit Analyst|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2017
Finbond Group Limited rating reports (2011-16)
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; c.) such rating was an independent evaluation of the risks and merits of the rated entity; 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 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 Finbond Group Limited with no contestation of the ratings.
Information received from Finbond Group Limited and other reliable third parties to accord the credit ratings included:
- Audited financial results at 29 February 2017 (and four years of comparative numbers);
- Latest internal and/or external audit report to management;
- Reserving methodologies and capital management policy;
- A breakdown of facilities available and related counterparties;
- Corporate governance and enterprise risk framework; and
- Industry comparative data and regulatory framework.
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||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.|
|Audit Report||A written opinion of an auditor (attesting to the financial statements’ fairness and compliance with generally accepted accounting principles).|
|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|Capital||The sum of money that is invested to generate proceeds.|
|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.|
|Collateral||Asset provided to a creditor as security for a loan.|
|Corporate Governance||Refers to the mechanisms, processes and relations by which corporations are controlled and directed, and is used to ensure the effectiveness, accountability and transparency of an entity to its stakeholders.|
|Diversification||Spreading risk by constructing a portfolio that contains different investments, 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.|
|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.|
|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.|
|Liabilities||All financial claims, debts or potential losses incurred by an individual or an organisation.|
|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.|
|Liquidity Risk||The risk that a company may not be able to meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets. Regarding securities, the risk that a financial instrument cannot be traded at its market price due to the size, structure or efficiency of the market.|
|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.|
|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.|
|Portfolio||A collection of investments held by an individual investor or financial institution. They may include stocks, bonds, futures contracts, options, real estate investments or any item that the holder believes will retain its value.|
|Provision||The amount set aside or deducted from operating income to cover expected or identified loan losses.|
|Regulatory Capital||The total of primary, secondary and tertiary capital.|
|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 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.|
|Tier 1 Capital||Primary capital consists of issued ordinary share capital, hybrid debt capital, perpetual preference share capital, retained earnings and reserves. This amount is then reduced by the portion of capital that is allocated to trading activities and other regulatory deductions.|
For a detailed glossary of terms please click here