In a recent statement, the Johannesburg based rating firm said the ratings on Letshego Micro Financial Services (Namibia) (LMFSN) reflect the credit profile of Letshego Holdings Namibia Limited (LHN).
“GCR believes the company is a core part of the Letshego Namibia group. On 30 October 2020, LMSF’s contribution to group net profit before tax (59.2 percent) and assets (53.5 percent) was significant. As such, the ratings of LMSFN are equalised to the group anchor credit evaluation group credit profile. However, if the level of importance reduces, the ratings on LMFSN may be delinked from the group ACE,” the report said.
GCR further noted that the ratings are restrained by the relatively weaker business profile of the group in comparison to domestic commercial banks characterised by its small size, moderately high cost of funding and relative lack of diversity.
“The ratings benefit from good levels of liquidity and capitalisation, offset by relatively weaker asset quality and a concentrated wholesale funding structure,” the report said while assigning the group’s business profile a negative rating.
The report further noted that the LHN has significantly smaller and less diverse operations (by product and business lines) than the large domestic banks operating in Namibia. “This weakness is partly offset by strengths within its chosen niche characterised by a high market share in deduction at source of approximately 48 percent,” the GCR stated.
The bank is currently leveraging on synergies with its sister company LMFSN to facilitate migration of DAS clients to banking customers. Whilst diversification efforts outside DAS lending is strategically appropriate, it is also expected to be challenging, given high barriers to entry and competition with larger more established commercial banks. Namibia’s financial sector is dominated by four large and heterogeneous financial conglomerates, all with close ownership and funding links to South Africa, the rating firm noted.
The report explained that positively, capitalisation is strong, as shown by a very high GCR capital ratio of 76 percent at 30 June 2020 (FY19: 95 percent), which is expected to range from 65 to 70 percent over the next 12 to 18 months.
“Earnings are supportive of strong capitalisation, although over the next 12 to 18 months profitability will largely depend on how the group manages potentially higher credit losses and funding new / additional product projects,” the report warned.
“While reserving is considered low in relation to rated peer banks, the group enjoys insurance post default recovery cover with strong insurers and inherently collateralised loan book. However, DAS loans originated without insurance / deductions cover expose the group to potential increase in cost of risk with a negative impact on earnings over the longer-term,” the GCR report added.