Johannesburg, 19 May 2017—Global Credit Ratings has upgraded the national scale ratings accorded to AFB (Ghana) Plc to BB+(GH) and B(GH) in the long term and short term respectively; with the outlook accorded as Positive. The ratings are valid until April 2018.
AFB (Ghana) Plc (“AFB Ghana”, “the company”) is a non-bank financial institution licenced by the Bank of Ghana, and provides unsecured consumer finance to the un/under-banked market through its 25 branches. The company’s lending focus has traditionally been on payroll-based collections; short-term and direct loan product launched in FY15, and which do not yet exhibit targeted collection levels, represented around 4% of company credit exposure at FY16 (FY15: 7%).
Formerly owned by Jumo World Limited (“Jumo World”), effective 31 December 2016 the company was sold to Letshego Holdings Limited (“Letshego”, “the group”), a pan-African payroll lender headquartered and listed in Botswana, and operating in 11 countries in South, East and West Africa. The impact of the Letshego acquisition on AFB Ghana is potentially significant, as Letshego’s financial resources, strong brand in the region, and ambitious inclusive finance-oriented growth strategy across the continent are likely to inform and enhance AFB Ghana’s growth strategy.
Global Credit Ratings (“GCR”) has accorded the above credit rating(s) to AFB Ghana based on the following key criteria:
The ratings of AFB Ghana reflect its growing lending business, increased funding independence and diversification, and strong management. The recent acquisition of AFB Ghana by Letshego is also factored into the ratings. At FY16, Letshego completed the acquisition of AFB Ghana from Jumo World. The acquisition is considered strategic as AFB Ghana has the opportunity to diversify its product offering while maintaining operational continuity. Letshego’s strong presence in West Africa, in which AFB Ghana operates, its strong capitalisation, and substantial business similarities with AFB Ghana are likely to translate into sustainable financial and technical support for AFB Ghana.
The company remains well capitalised. However, leverage increased marginally to 3.6x (FY15: 3.4x), with a concomitant reduction in the capital adequacy ratio (“CAR”) to 22.5% (FY15: 27.5%), which is considered adequate. The regulatory minimum CAR was 10% at FY15 and FY16.
The company’s medium-term note (“MTN”) programme helped AFB Ghana to extend the term of its debt funding to match/exceed that of the asset portfolio. At FY16, the average term of the loan portfolio was 41 months (MTN: 48 months). AFB Ghana aims to match the term of its liabilities to the loan book, but it is noted that during much of FY16, AFB Ghana benefitted from the term mismatch. Interest rate risk is significant, as lending is at fixed rates while most debt funding is linked to floating 182-day treasury bill rates. During FY16, the combination of funding and repricing mismatches, interest rate movements and decreasing (although still high) funding costs yielded net interest margin expansion.
Advances growth was significant at 30.4% in FY16. The loan book quality improved with non-performing loan (“NPL”) and credit loss ratios decreasing to 9.0% (FY15: 10.2%) and 11.2% (FY15: 15.1%) respectively. NPL coverage declined slightly in FY16 but remained close to 100%, although total loan provision coverage reduced to 9.0% (FY15: 11.2%) due to AFB Ghana’s increased ability to collect on written off debt. Strong payroll collection rates have helped improve overall loan book quality.
AFB Ghana posted headline earnings of GHS3.1m in FY16 (following losses in FY15), yielding ROaE of 10.7% and ROaA of 3.1% in FY16. Cost containment continued to be a significant management focus, and the FY16 cost ratio decreased to 60.5% (FY15: 66.2%).
Ghana’s economy is expected to benefit from improved political/fiscal stability, which could pre-empt lower inflation and interest rates. While AFB Ghana is strategically well positioned to benefit from positive economic growth trends, it remains exposed to operational risks.
Stability/enhancement in earnings, funding diversification and asset quality (collections), combined with increased operational scale may enhance the ratings. Negative rating pressure may arise from evidence of funding or capital raising constraints, and/or sustained diminution in capitalisation, liquidity or profitability metrics.
NATIONAL SCALE RATINGS HISTORY
Initial rating (May 2014)
Long term: BB(GH); Short term: term: B(GH)
Last rating (April 2016)
Long term: BB(GH); Short term: term: B(GH)
Sector Head: Financial Institution Ratings
Junior Credit Analyst
Senior Credit Analyst
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Banks and Other Financial Institutions, updated March 2017
Global Criteria for Rating Finance and Leasing Companies, updated March 2017
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 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; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
AFB (Ghana) Plc participated in the rating process via 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 AFB (Ghana) Plc with no contestation of the rating.
The information received from AFB (Ghana) Plc and other reliable third parties to accord the credit ratings included:
- Audited financial results of the company at 31 December 2016;
- Four years of comparative numbers;
- Management accounts to 28 February 2017;
- Latest internal and/or external reports to management;
- A breakdown of facilities available and related counterparties; and
- Corporate governance and enterprise risk framework.
The ratings above were solicited by, or on behalf of, AFB (Ghana) Plc, 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.|
|Balance Sheet||Also known as a 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.|
|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.|
|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.|
|Correlation||A term that describes the degree to which two variables move together. A correlation of 1 means that they move together exactly, while a correlation of minus 1 means that they move in exactly the opposite direction from each other.|
|Cost Ratio||The ratio of operating expenses to operating income. Used to measures a bank’s efficiency.|
|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.|
|Credit Rating Agency||An entity that provides credit rating services.|
|Creditworthiness||An assessment of a debtor’s ability to meet debt 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 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.|
|Equity||Equity (or shareholders’ funds) is the holding or stake that shareholders have in a company. Equity capital is raised by the issue of new shares or by retaining profit.|
|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.|
|Financial Institution||An entity that focuses on dealing with financial transactions, such as investments, loans and deposits.|
|Forecast||A calculation or estimate of future financial events.|
|Hedging||A financial risk management process or function to take a market position to protect against an eventuality. Taking an offsetting position in addition to an existing position. The correlation between the existing and offsetting position is negative.|
|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.|
|Insolvent||When an entity’s liabilities exceed its assets.|
|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.|
|Interest Rate Risk||Interest rate risk in the banking book is the risk that earnings or economic value will decline as a result of changes in interest rates. The sources of interest rate risk in the banking book are repricing/mismatch, basis and yield curve risk.|
|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.|
|Leverage||With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.|
|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.|
|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.|
|Net Interest Margin||Net interest income divided by average interest earning assets. Measures a bank’s margin after paying funding sources and how successful a bank’s interest-related operations are.|
|Off Balance Sheet||Off balance sheet items are assets or liabilities that are not shown on a company’s balance sheet. They are usually referred to in the notes to a company’s accounts.|
|Operational Risk||The risk of loss resulting from inadequate or failed internal processes, people or systems or from external events. This includes legal risk, but excludes strategic risk and reputational risk.|
|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.|
|Principal||The total amount borrowed or lent, e.g. the face value of a bond, excluding interest.|
|Provision||The amount set aside or deducted from operating income to cover expected or identified loan losses.|
|Redemption||The repurchase of a bond at maturity by the issuer.|
|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.|
|Risk Management Process||The systematic application of management policies, procedures and practices to the tasks of risk identification, assessment and measurement, response and action, monitoring and review, and risk reporting.|
|Security||An asset deposited or pledged as a guarantee of the fulfilment of an undertaking or the repayment of a loan, to be forfeited in case of default.|
|Shareholder||An individual, entity or financial institution that holds shares or stock in an organisation or company.|
|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.|
|Term Deposit||A savings account held for a fixed term. Also called a time deposit. Generally, there are penalties for early withdrawal.|
|Tertiary Capital||Capital held by banks to cover certain classes of risk, including foreign currency exchange risk and commodities risk. To qualify as Tier 3 capital, assets must be limited to 250% of a bank’s Tier 1 capital, be unsecured, subordinated, and have a minimum maturity of two years.|
|Treasury Bill||Short-term obligation backed by the government that bears no interest and is sold at a discount.|
|Yield||Percentage return on an investment or security, usually calculated at an annual rate.|
For a detailed glossary of terms please click here
GCR upgrades the long term national scale rating of AFB (Ghana) Plc to BB+(GH); Oulook Positive