Johannesburg, 13th September 2019 – GCR Ratings (‘GCR’) has upgraded Retail Capital Proprietary Limited’s long-term South African national scale rating to BB+(ZA), and affirmed the short-term rating of B(ZA). The long-term international scale rating has been affirmed at B. The outlooks are Stable.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook / Watch|
|Retail Capital Proprietary Limited||Issuer Long Term||National||BB+(ZA)||Stable Outlook|
|Issuer Short Term||National||B(ZA)||–|
|Issuer Long Term||International||B||Stable Outlook|
GCR has reviewed the ratings on Retail Capital Proprietary Limited under the Criteria for Rating Financial Institutions, May 2019. The ratings were placed “Under Criteria Observation” at the time of criteria publication. Subsequently, GCR has finalised the review under the new methodology, and the ratings have been removed from ‘Under Criteria Observation’.
The international and South African national scale ratings on Retail Capital Limited (‘Retail Capital’, ‘the company’) reflect a relatively weak market position versus rated South African peers, strong leverage and earnings, a high cost of risk, and a modest funding profile but strong liquidity.
Cape Town based- Retail Capital is a small lender, exclusively operating in the highly competitive and oligopolistic South African financial sector. Retail Capital’s primary focus is on providing credit to small and medium-sized entities (“SMEs”), a sector traditional underserved by South Africa’s largest financial institutions. Whilst the barriers to entry are low, the low risk appetite of the banks (in particular) has meant that they rarely provide credit to SMEs due to their small size; limited financial track record; less formalised financial reporting and business processes; and/or lack of access to suitable loan collateral. However, through its Merchant Cash Advance (“MCA”) product, which links customers’ advance repayments to a proportion of card turnover, alongside its asset finance business, RC navigates these relatively higher risks. Positively, the company has managed to achieve good growth over the past few years, while maintaining stable revenues, despite the weak operating environment.
Leverage is considered to be strong, as shown by a GCR leverage ratio of 25% at March 31st 2019 (FY18). The ratio materially improved in the 12months leading up to FY 18, due to a premium arising from issue of equity shares. We are expecting some an improvement on the leverage ratio, from a capital R35m capital injection by the shareholder over the next 12 months, and it remaining firmly in the ‘highest’ assessment. The strong capital position is supported by strong earnings, with an average return on assets of between 6%-7% over the past 4 years. GCR expects the ROaA to remain above 6% over the next 2 years.
The cost of risk is high, and relatively weaker than the peer group. GCR anticipates a through the cycle cost of risk of around 6-7% in comparison to 1-1.5% for the banking sector. The NPL ratios are good at 3.5% at FY2019 and are expected to remain in the 3-5% range in the next 12 months. However, this is supported by aggressive write offs, which were around 8% of the loan book in 2018. Concentrations are low with the top 20 advances accounting for 15.4% of total advances and the highest exposure accounts for 3.5% of total loans. The book is also fairly diversified in terms of industry with most of it being in different retail sectors and manufacturing. The rapid growth of the loan book expected to be at least 25% in the next 12 months, is a source of risk but the growth has been managed well over the years with adequate systems.
Retail Capital’s funding structure if fairly stable. Funding is predominantly wholesale, supplemented with retained earnings and equity. The stable funds are however low at 60%, due to the relatively high proportion of short-term debt on the books. At FY18, short-term wholesale funding contributed 41% of the total funding base. Nevertheless, liquidity is considered to be good, supported by a positive asset/liability mismatch due the short-term nature of lending. At FY18, the average term of the loan book was around 3 to 4 months.
The Stable outlook reflects our expectations that Retail Capital’s leverage ratio is expected to be above 30% over the next two years, supported by an ROaA of over 6%. We anticipate the cost of risk to remain in the 7% range, with loan loss reserves covering over 100% of NPLs. We also expect the aggressive write off of the loan book to continue. The Funding structure will change with the expected introduction of a note programme. Liquidity is expected to remain good, as any pressure from the entity growing its longer-term advances quicker than the short-term advances, will be alleviated by a new liquidity facility of R85m.
A national scale ratings improvement could arise from improved risk position and improvement in stable funds. A national scale downgrade could be caused by weaker asset quality, lower earnings, a reduction in leverage or lower liquidity.
|Primary analyst||Simbarake Chimutanda||Financial Institutions Analyst|
|Johannesburg, ZA||SimbarakeC@GCRratings.com||+27 11 784 1771|
|Committee chair||Mathew Pirnie||Sector Head: Financial Institutions|
|Johannesburg, ZA||MathewP@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, June 2019|
|GCR Financial Institutions Sector Risk Score, July 2019|
Retail Capital Proprietary limited
|Rating class||Review||Rating scale||Rating class||Outlook||Date|
|Issuer Long Term||Initial||National||BB(ZA)||Stable||April 2017|
|Issuer Short Term||Initial||National||B(ZA)||April 2017|
|Issuer Long Term||Initial||International||B||Stable||April 2017|
Risk Score Summary
|Country risk score||7.5|
|Sector risk score||5.0|
|Management and governance||0.0|
|Capital and Leverage||4.0|
|Funding structure and Liquidity||0.0|
|Capital||The sum of money that is invested to generate proceeds.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|Credit Rating||An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.|
|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.|
|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.|
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; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The credit rating has been disclosed to Retail Capital Proprietary 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 rating.
Retail Capital Proprietary 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 information received from Retail Capital Proprietary Limited and other reliable third parties to accord the credit rating included:
- Audited financial results of Retail Capital Proprietary Limited as at 31 March 2019;
- Latest internal and/or external audit report to management;
- Industry comparative data.