Announcements Financial Institutions Rating Alerts

Retail Capital Limited’s ratings affirmed, national scale placed on negative outlook as earnings strain and rapid growth pressurises capitalisation.

Rating Action

Johannesburg, 30 August 2021 – GCR Ratings (‘GCR’) has affirmed Retail Capital Limited’s international scale long-term issuer rating of B-, with a Stable Outlook. At the same time, GCR has affirmed Retail Capital Limited’s South African long and short-term issuer ratings of BB+(ZA)/B(ZA), with the outlook accorded as Negative.

Rated Entity / Issue Rating class Rating scale Rating Outlook / Watch
Retail Capital Limited Long Term Issuer National BB+(ZA) Negative Outlook
Short Term Issuer National B(ZA)
Long Term Issuer International B- Stable Outlook

Rating Rationale

The negative outlook on Retail Capital Limited’s national scale rating reflects the weakening of capitalisation as of June 30th 2021. We could lower the national scale ratings if the GCR leverage ratio doesn’t increase to more than 20% on a sustainable basis, including a normalisation of earnings post the worse of the COVID-19 inspired crisis.

As of June 30th 2021, the GCR leverage ratio measured at 12%, down from 21.75% at March 31st 2020. The primary reasons for the reduction in capitalisation was rapid loan growth (over 30%, year on year from March 31st 2020) and weak earnings with return on assets reducing to 0.2% from the longer-term average of above 5%. The fall in earnings represented the reduction in collections/high risk costs from the loan book through periods of severe operating environment stress. Positively, earnings appear to be improving significantly. The first quarter of 2022, from March 31st to June 30th, demonstrated improved quality and collections of the loan book. We expect the GCR leverage ratio to increase towards 20% before the end of the year, the result of improved earnings from the loan book but also from a R80m capital raise by the end of the year. As a result, capital and earnings remain significantly positive to the ratings.

The loan book has weakened notably over the past 18 months, during the stresses caused by the lockdowns. Net charge-offs increased to 10.5% of average loans at March 31st 2021, significantly above the longer-term average for the business. However, we think the two-year average net charge-off and cost of risk (around 7.5%) is a more accurate representation of longer-term asset quality and forecast this to continue over the outlook horizon, albeit with some upside. These ratios obviously compare poorly to larger, more diversified and (semi)secured banking books in South Africa, hence resulting in the negative assessment. Positively, concentrations are low with the top 20 advances accounting for 10% of total advances and the single largest exposure accounts for 5% of total loans.

We view the funding and liquidity of the entity to be a moderately positive ratings factor. The sources of funds have diversified materially over the past 18 months. As of June 30th 2021, no single funder contributed over 20% to total funds and the top 5 funders contributed around 75% of total funds. The funding does have covenants, which include capital adequacy and Non-performing loans (‘NPLs”) ratios, but there is relatively good headroom. The majority of the funds are bullet repayments, most with floating rates, but maturity of the funds are well spaced out minimising refinancing risks.

Positively, liquidity is considered to be robust, with GCR uses versus sources coverage of 1.5 for 1 year and 1x for 18 months. This is largely supported by the short-term and high margin nature of the loan book.

Retail Capital is primarily a cash flow financier of SMEs lacking access to traditional finance from commercial banks. We view this concentration to SMEs and the limited product line to be a relative weakness to the rating, in comparison to the large and diverse regulated banks. Revenue stability has been moderate, in comparison to large domestic financial institutions.

Outlook Statement

The negative outlook on the national scale reflects the risk that the entity doesn’t restore capitalisation back to 20% (using the GCR leverage ratio) in the next 6 months and earnings fail to normalise on a sustainable basis.

Rating Triggers

We could lower the national scale ratings if leverage doesn’t improve above 20% on a sustainable basis, including a normalisation of earnings and cost of risk. An upgrade is unlikely, but significant capital headroom above the 20% level would be a strong positive sign, as would stronger liquidity. The international scale ratings are unlikely to move without a significant change in the operating environment or financial conditions of the entity.

Analytical Contacts

Primary analyst Corné Els Financial Institutions Senior Analyst
Johannesburg, ZA CorneE@GCRratings.com +27 11 784 1771
Committee chair Vinay Nagar Financial Institutions Senior Analyst
Johannesburg, ZA Vinay@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 Rating Scales, Symbols & Definitions, May 2019
GCR Country Risk Scores, August 2021
GCR Financial Institutions Sector Risk Score, June 2021

Ratings History

Retail Capital limited

Rating class Review Rating scale Rating Outlook Date
Long Term Issuer Initial National BB(ZA) Stable April 2017
Last National BB+(ZA) Stable July 2020
Short Term Issuer Initial National B(ZA) N/A April 2017
Last National B(ZA) N/A July 2020
Long Term Issuer Initial International B Stable April 2017
Last International B- Stable July 2020

Risk Score Summary

Rating Components & Factors Risk scores
Operating environment 12.00
Country risk score 7.00
Sector risk score 5.00
Business profile (3.50)
Competitive position (3.50)
Management and governance 0.00
Financial profile 0.50
Capital and Leverage 3.50
Risk (3.50)
Funding and Liquidity 0.50
Comparative profile 0.00
Group support 0.00
Government support 0.00
Peer analysis 0.00
Total Score 9.00

Glossary

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 ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

The credit ratings have been disclosed to Retail Capital 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 ratings.

Retail Capital 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 Limited and other reliable third parties to accord the credit rating included:

  • Audited Annual Financial Statements at 31 March 2021;
  • 30 June 2021 Management Accounts;
  • 2022 Budget;
  • Compliance Certificates for 31 March 2021; and
  • Industry comparative data.
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