- Letshego well capitalized and profitable
- Successfully developing broader African financial services operations are becoming critical
- Negative pressure could be exerted if authorities impose restrictions on deductions at source.
- Letshego raises R2.5bn and P2.5bn
Credit Rating Agency, Moody’s has affirmed Letshego’s credit rating and given it the thumbs up for its plans of raising P2.5 billion and R2.5 billion, Letshego has announced on the Botswana Stock Exchange (BSE).
The company announced that pursuant to the terms and conditions of the R2,500,000,000 and P2,500,000,000 Medium Term Note Programme, noteholders are advised that credit rating agency Moody’s Investor Service (Moody’s) has affirmed Letshego Ba3/Not Prime issuer rating and assigned Ba2 Corporate Family Rating (CFR).
Moody’s has stated that the ratings assigned to Letshego capture the company’s solid capitalisation buffers and profitability that are supported by high margins. Furthermore, the rating balances these strengths against Letshego’s sensitivity of its credit profile to changes in regulatory and legal frameworks, high exposure to foreign exchange risk and elevated asset quality risks, and dependence on market-sensitive wholesale funding, although actions are being taken to address this weakness.
“The outlook on Letshego is stable,” says Moodys. “The stable outlook reflects Moody’s expectation that the company’s financial fundamentals will remain robust over the next 12 to 18 months horizon, despite elevated credit risks from its regional expansion.”
The rating agency reflects its expectation that the company’s financial fundamentals will remain relatively stable over the next 12 to 18 months. This is against the background of elevated credit risks from its regional and lending expansion.
Moody’s says the rating assigned to Letshego captures the company’s solid capitalisation and profitability, supported by its niche, low-cost, franchise. Further, it also captured Letshego’s growing diversification across regional countries, which makes the company more resilient to an adverse change in any one of its operating markets. The rating agency says it balances these strengths against Letshego’s narrow, albeit gradually diversifying, business model, with a high reliance on payroll deductions for loan repayment collections. Letshego also has high exposure to foreign exchange risk, elevated asset quality risks, and dependence on market-sensitive wholesale funding, although actions are being taken to address this weakness.
The Ba3 issuer rating assigned to Letshego reflects its stand-alone credit profile. Moody’s says the credit strengths of Letshego are gradually diversifying its business model across products and countries and that the company has solid capitalisation buffers, and strong profitability supported by high margins. Moody’s, however, says the credit profile of Letshego is sensitive to changes in regulatory and legal frameworks.
Further Letshego’s large foreign currency exposures, asset quality risks remains elevated and a high reliance on wholesale market funding and weak liquidity metrics. Moody’s says an upgrade of the company’s rating would depend on Letshego successfully developing broader African financial services operations while maintaining strong profitability and capitalisation and strengthening its liquidity profile. A negative rating pressure could be exerted on Letshego’s rating if regional authorities in the company’s main operating markets change the terms of, or impose restrictions on, the deduction (at source) of loan repayments from the wages of public-sector employees, leading to a sharp rise in bad debts and impairment costs, according to Moody’s.
In addition, the agency says negative pressure could be exerted on the rating if Letshego’s expansion in other sub-Saharan markets, client segments and products, result in a material weakening of asset quality and profitability metrics or if Letshego’s capitalisation metrics were to materially weaken.
Letshego has a niche franchise specialising in unsecured loans to government and quasi-government employees under the payroll deduction model (around 68 percent of total loans). Under this model, loan repayments are taken directly from the employer prior to the distribution of monthly salaries. Moody’s says Letshego’s business model benefits from a quick and efficient loan-approval and disbursement process and has historically led to fairly low credit costs and strong profitability.
However, at the same time, its concentration to this product exposes the company to adverse developments in the regulatory and legal framework. Moody’s says this may either hamper the payroll deduction process or impose or lower caps on the effective interest rate the company can charge on loans. To counter these risks, Letshego has been increasing its geographical diversification and has a strategy to diversify its business model by becoming a pan-African financial services company. As part of this strategy, it has completed various acquisitions across Africa, has acquired banking and deposit taking licences in several territories (it has a deposit-taking licence in Ghana, Mozambique, Rwanda, Tanzania, Nigeria and Namibia) and aims to convert its loan-only clients into transactional clients.
The company currently has operations in 11 sub-Saharan African countries, with a strong niche franchise within Botswana (where it offers payroll loans to around 20 percent of all government employees as of June 2018), Namibia (51 percent of government employees), and Mozambique (22 percent of government employees), according to Moody’s. Outside these three markets, Letshego currently exhibits a lower franchise sustainability, given its weaker brand name and lower market penetration.
Moody’s says Letshego’s expansion will gradually reduce its overall dependence on payroll lending (by broadening customer segments and products) and support its deposit mobilisation capabilities. However, going forward, the agency says the company will need to manage potentially elevated credit losses from riskier non-payroll related loans (micro finance group loans, micro and small enterprise business loans, and low-income housing loans), albeit compensated by higher margins. They will also need to manage higher sub-Saharan Africa country risks and its relative inexperience in these newer markets and product offerings, says Moody’s.
Letshego’s business model has historically led to fairly low credit costs, reduced collection costs and improved collection statistics. As a consequence, Moody’s found that Letshego’s overall credit costs remained fairly low at 2.5 percent as at June-end 2018 (year-end 2017: 2.9 percent). With Letshego gradually diversifying into riskier non-payroll loans, Moody’s warns that non-performing loans (NPLs) will likely increase, although this is countered by the diversification benefits obtained. In addition, the fear is that the subdued economic environment in many countries where Letshego operates, and the higher provisioning needs under new IFRS 9 guidelines (an issue faced by financial institutions globally) imply further pressure on NPLs and provisioning needs.
Letshego disclosed an NPL ratio of 7.6 percent as at June-end 2018, higher than the 6.8 percent reported in December 2017. Increasing NPLs are primarily due to challenging operating conditions in some of Letshego’s regional operations, such as Tanzania, Rwanda and Uganda. In addition, an increased portion of non-payroll related loans to total loans. Reported loan loss provisions to pre-provision income were 15.5 percent as of June-end 2018 (19.1 percent for 2017), with the problem loans coverage (loan loss reserves to NPLs) improving to 95 percent of NPLs from 73 percent in December 2017.
Additionally, Letshego has comprehensive credit insurance cover in markets like Namibia and Mozambique that increases the post-default recovery. Going forward, Moody’s expect elevated asset risks to be moderated by improvements to Letshego’s risk management processes. Letshego is making ongoing investments to improve automation in credit risk management. “While we currently anticipate capital levels to drop further, Letshego’s capitalisation level is expected to continue to underpin the current ratings,” Moody’s says. The company is currently well capitalised, with a reported shareholders’ equity-to-total assets ratio of 42.6 percent as at June 2018, which provides a solid buffer against any adverse changes to both the competitive environment and to its current business model. Any material drop in capitalisation more than what Moody’s currently anticipates could weigh on its current rating. To maximise shareholder returns, Letshego plans to increase leverage by acquiring more debt and/or reducing equity levels through share buybacks. Letshego’s long-term target equity-to-total assets ratio is 30 percent, which still represents a robust level of capitalisation.