GCR Affirms Finbond Group Limited’s Rating of BBB(ZA); Outlook Stable
FINBOND GROUP LIMITED
(Incorporated in the Republic of South Africa)
(Registration number: 2001/015761/06)
Share code: “FGL”
(“Finbond” or “the Company” or “the Group")
GCR AFFIRMS FINBOND GROUP LIMITED’S RATING OF BBB(ZA); OUTLOOK STABLE
Shareholders are advised that Global Credit Ratings has affirmed the national
scale ratings assigned to Finbond Group Limited of BBB(ZA) and A3(ZA) in the long
term and short term respectively; with the outlook accorded as Stable. At the
same time, Global Credit Ratings has affirmed the long-term international scale
local currency rating assigned to Finbond Group Limited of B+; with the outlook
accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Finbond
Group Limited (“Finbond” or “the group”) based on the following key assumptions:
• The ratings on Finbond reflect its monoline market segment, good
geographic diversification, strong capitalisation supported by good
internal capital generation, weak risk position, stable funding and robust
• The company profile is a negative rating factor balancing the predominant
focus of unsecured lending, small market share, good geographic diversity
relative to peers. While the secured lending product is being rundown,
the monoline strategy of unsecured lending exposes the group to increased
risk from credit events and regulation just to mention a few. On the
other hand, the geographical expansion of the group into North America
has strengthened its competitive position. In addition, better earnings
diversification is also viewed positively, with c.63% of the group’s
earnings currently generated by international businesses, with the
expectation to grow this to c. 70-80% in 3 to 5 years.
• Finbond’s capitalisation is strong and is one of the key factors
supporting its rating. The equity/total assets ratio registered within
strong range (48.2% at 1H19). Conversion of shareholder loans (R365m) to
Tier 1 equity during 1H19 has also helped capitalisation which we view
to be stronger as a result. The group’s banking subsidiary Finbond Mutual
Bank had a capital adequacy ratio of 34.8%, reflecting a good headroom
above the regulatory minimum. Over the next two years, we expect
capitalisation to range around 35-40%, supported by internal capital
generation which in part benefits from the favourable profiles of acquired
short term lenders as required by the group’s investment criteria. But
also, annualised margins are high given the short term nature of assets
while financing is long term.
• The group’s funding is stable, which lessens the risk of this entity
defaulting. Equity, term deposits, and shareholder loans are the major
funding sources. Liquidity is robust, supported by high collections on
short term loans averaging 94% during the year. Basel III liquidity
coverage ratio of 168% vs regulatory minimum of 90% supports this
• Risk position is weak, demonstrated by the high write offs. Adoption of
IFRS 9 resulted in the group changing the write off policy from a
delinquency approach (1AS 39) to a staging approach based on expected
recoveries. Because of Finbond’s quick write off cycle under IAS 39, off
balance sheet bad debts were brought back on balance sheet as the group
still expect collections on these accounts. This escalates the arrears
ratio to 66.2%, however with no material impact on earnings expected
given a loan loss reserve coverage of 85.1%. In addition, the group
recovers on average 28.9% of bad debts written off within the same year.
Collections from the USA portfolio continued to be higher relative to
South Africa, although the group’s average declined to 83% at 1H19.
• The upside rating movement is sensitive to increased contribution to
earnings by the international business, sustained capital and liquidity
positions, diversification of business to more of transactional banking,
and material improvement in asset quality. While downside pressure may
stem from capitalisation reducing materially, worsening asset quality and
reserving, coupled with unstable funding structure.
24 December 2018
Sponsor: Grindrod Bank Limited
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