Announcements

GCR upgrades Trustco Group Holdings Limited rating to BBB(NA); Outlook Positive

Johannesburg, 27 Jul 2015—Global Credit Ratings has upgraded the national scale ratings assigned to Trustco Group Holdings Limited of BBB(NA) and A2(NA) in the long term and short term respectively; with the outlook accorded as Positive.

SUMMARY RATING RATIONALE

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

The ratings of Trustco reflect its entrenched financial services position (in education finance and mass-market insurance), and value-adding property investments. Sound capital and leverage metrics relative to its evolving risk profile/business mix also support the ratings. The rating/s outlook considers Trustco’s increasing operational scale, improved organisational efficiency, and long-term earnings diversification plans, coupled with supportive macroeconomic and property price trajectories in Namibia. Furthermore, strategic planning of the property sales pipeline has begun to enhance the quantum/sustainability of income from investments.

While Trustco’s capitalisation ratio remained stable at 49%, rising leverage since the beginning of F14 reflects the increased use of debt to fund interest-bearing asset growth. In F15, net new funding of NAD330m was applied towards 15.3% growth in net advances (to NAD807m), property additions, and financing of pre-transfer land sales (c.NAD503m). Total assets grew 27.7% to NAD3,159m at FYE15, driven by a 50:50 debt:equity contribution.

High earnings retention (F15: NAD297m), supportive dividend policies, diversified funding partners including Development Finance Institutions (“DFIs”), and more sustainable cash flows, underscore the group’s increased debt capacity. However, higher debt levels and interest rates pushed up the after-tax cost of debt from 6.4% in F14 to 7.1% in F15, and gross interest cover fell from 13.9x (F14) to a still-comfortable 9.0x in F15.

Credit quality in the student loan book (77% of gross advances) declined. The (fully provided) impairment ratio rose from 3.5% (FYE14) to 5.6% (FYE15) as loan growth slowed, but overall impairment rates were stable as legacy exposures were written off.

Trustco posted 20% net income growth to NAD303m in F15. Earnings from Namibian insurance, finance and investments easily absorbed the losses from South African insurance, and banking. The investment segment contributed NAD266m. Return on assets and equity declined marginally to 10.8% and 21.9% respectively in F15 (F14: 12.6%, 23.1%).

Constructive Namibian macroeconomic trends, structural support for property prices and a strategy which is geared towards enhancing the sustainability and diversification of earnings, while prioritising stakeholder needs, support strong group prospects.

Increased earnings diversification and operational efficiency, stability in segmental revenue streams, and the maintenance of conservatism in capitalisation/leverage metrics could have a positive impact on the ratings. The ratings will be impacted by negative trends in asset quality, profitability/earnings stability, and/or leverage (beyond sustainable levels), combined with adverse macroeconomic developments in key markets.

NATIONAL SCALE RATINGS HISTORY    
     
Initial rating (Jul/2012)   Last rating (Jul/2014)
Long term: BBB-(NA); Short term: A3(NA)   Long term: BBB-(NA); Short term: A3(NA)
Outlook: Stable   Outlook: Stable

ANALYTICAL CONTACTS

Primary Analyst   Committee Chairperson
Omega Collocott   Jennifer Mwerenga
Sector Head: Financial Institution Ratings   Senior Credit Analyst
(011) 784-1771   (011) 784-1771
omegac@globalratings.net   jennifer@globalratings.net

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Global Master Criteria for Rating Banks and Other Financial Institutions, updated March 2015

Trustco rating reports (2012-14)

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; and c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

Trustco Group Holdings Limited participated in the rating process via 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 Trustco Group Holdings Limited with no contestation of the rating.

The information received from Trustco Group Holdings Limited and other reliable third parties to accord the credit rating(s) included:

  • Audited financial results of the group to 31 March 2015;
  • Four years of comparative numbers;
  • Budgeted financial statements for Trustco Group Holdings Limited;
  • 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, the rated client, 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 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 (i.e. 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.
Cap A provision in a loan agreement that sets a limit on the interest rate which can be charged during the term of the loan.
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.
Corporate Governance Corporate governance broadly 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.
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.
Credit Risk The possibility that a bond issuer or any other borrowers (including debtors/creditors) will default and fail to pay the principal and/or interest when due.
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.
Default Failure to meet the payment obligation of either interest or principal on a debt or bond. Technically, a borrower does not default, the initiative comes from the lender who declares that the borrower is in default.
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.
Dividend The portion of a company’s after-tax earnings that is distributed to shareholders.
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.
Exchange A standardised marketplace in which different assets are traded.
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.
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.
Fraud The unlawful and intentional making of a misrepresentation which causes actual and or potential prejudice to another.
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.
Income Statement A summary of all the expenditure and income of a company over a set period.
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.
Lease Conveyance of land, buildings, equipment or other assets from one person (lessor) to another (lessee) for a specific period of time for monetary or other consideration, usually in the form of rent.
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. 
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 Not current; ordinarily more than one year.
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 The national scale 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.
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. 
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.
REPO In a REPO one party sells assets or securities to another and agrees to repurchase them later at a set price on a specified date.
Return on Assets A ratio of the attributable profits for the last 12 months to total assets (fixed and current) for the same period, expressed as a percentage. It measures how effectively a company generates earnings from its assets. 
Risk The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.
Securities Various instruments used in the capital market to raise funds.
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.
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