Moody's tags Letshego's outlook as "stable"

23 Nov 2018

Business Weekly and Review

MOODY'S TAGS LETSHEGO'S OUTLOOK 'STABLE' The rating captures the company's solid capitalization and profitability rating reflects Letshego's stand alone credit profile upgrade would depend on successfully developing broader African financial services operations Negative pressure could be exerted if authorities impose restrictions on the deduction at source . Pension funds 3% Staff Writer Moody's Investors Service has assigned Letshego HoldingsLimited long and short term global scale ratings of Ba3 Not Prime which carries a stable outlook. The rating agency in its recently released report cited that the stable outlook 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 said the rating assigned to Letshego captures the company's solid capitalization 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 said 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 outlines that the credit strengths of Letshego is gradually diversifying its business model across products and countries, it has solid capitalization buffers, and strong profitability supported by high margins. Moody's however said 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 said an upgrade of the company's rating would depend on Letshego successfully developing broader African financial services operations, while maintaining strong profitability and capitalization, 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 said negative pressure could be exerted on the rating if Letshego's expansion in other sub Saharan markets, client segments and products, results in a material weakening of asset quality and profitability metrics or if Letshego's capitalization metrics were to materially weaken. Letshego has a niche franchise specializing 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 said 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 the aforementioned product exposes the company to adverse developments in the regulatory and legal framework. Moody's said 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 licenses in several territories it has a DFIs 12% Commercial banks 42% deposit taking license 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 eleven 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 said Letshego's expansion will gradually reduce its overall dependence on payroll lending by broadening customer segments and products and support its deposit mobilization capabilities. However, going forward, the agency added that 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 warned 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 capitalization level is expected Letshego has a niche franchise specializing 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. to continue to underpin the current ratings," Moody's said. The company is currently well capitalized, 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 capitalization, more than what Moody's currently anticipate, could weigh on its current rating. To maximize 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 capitalization. Note programmes 43%