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GCR affirms Finbond Group Limited’s Investment Grade Rating of BBB(ZA); Outlook Negative
FINBOND GROUP LIMITED
(Incorporated in the Republic of South Africa)
(Registration number: 2001/015761/06)
Share code: "FGL" ISIN: ZAE000138095
GCR AFFIRMS FINBOND GROUP LIMITED’S INVESTMENT GRADE RATING OF BBB(ZA); OUTLOOK
NEGATIVE
Shareholders are advised that Global Credit Ratings (“GCR”) has affirmed the national scale ratings
assigned to Finbond Group Limited (“Finbond” or “the group”) of BBB(ZA) and A3(ZA) in the long term and
short term respectively; with the outlook accorded as Negative. At the same time, Global Credit Ratings
has affirmed Finbond’s international scale long term issuer rating at B, with a Negative outlook.
The rating action follows a reduction in the South African country and financial institutions sector risk
assessments. On 24 June 2020, the South African Financial Institutions sector risk score was lowered to
7.5, from 8.0 previously. The South African country risk score was also lowered to 7.0, from 7.5 previously,
in a market alert released on 27 May 2020.
SUMMARY RATING RATIONALE
GCR has accorded the above credit ratings to Finbond based on inter alia the following assumptions:
• The ratings on Finbond balances the relative strengths and weaknesses of the North American and
South African operations, strong earnings supporting adequate levels of capitalisation, stable
funding structure, robust liquidity, weak risk position and a modest competitive position. The
outlook on both international and national scale ratings reflects the heightened country and sector
risk in the aftermath of COVID-19.
• Finbond’s competitive position is a relative weakness to the rating. The group is primarily a lender
of short-term unsecured consumer loans and has a relatively small retail franchise in comparison
to big commercial banks. Albeit geographically diversified, the group’s operations are significantly
smaller, less diverse (by product and business lines) than banking sector peers in the relative
markets. Positively, the group has good track record of revenue stability and this has been
bolstered in recent years on the back of growing international operations.
• The group’s capitalisation is moderately strong, reflected in the GCR leverage of c.11% as at FY20,
although representing a slight dip from the prior year due to share buybacks during the year.
Capital is managed on a debt/equity basis and the group targets a range of 1-1.5x. The debt/equity
ratio was 1.4x at 29 February 2020, which GCR considers to be strong, supported by strong
earnings. The group’s return on assets has been over 4% during the past two years, supported by
very high interest margins. We expect the GCR leverage ratio to deteriorate slightly over the next
12-18 months, given moderated earnings caused by COVID-19. The group sales are down by
between 40% and 50% due to low demand for loans during the various government imposed
restrictions in response to COVID-19.
• The group’s risk position is weak, reflected by high cost of risk of 32% at FY20. This is due to the
nature of unsecured consumer lending characterised by higher Loss Given Default ‘LGDs’ and
modest recoveries. Positively, reserving is good and has a conservative buffer over observed
defaults through the cycle. Loan concentrations are also very low reflected by average loan size of
below R1, 932 as of February 2020. Collections are good for both North America and South Africa,
and with reduced disbursements, a significant portion of the loan book is expected to convert to
cash.
• The group is predominantly funded by equity and term deposits, which GCR considers stable
funding sources. Robust levels of liquidity is supported by the very short term loan book registering
high collections (close to 100% inclusive of recoveries from bad debts). Given the high collection
rates and lower sales due to COVID-19, the resultant reduction in the loan book is expected to be
a conversion to cash. Accordingly, liquid assets are forecasted to be c.50% of balance sheet by end
of FY21 (currently 30%).
SUMMARY RATING OUTLOOK
• The group entered the COVID-19 crisis with robust levels of liquidity and we view this to sustain
throughout the rating horizon. However, the outlook is negative reflecting the potential impact
from the strained operating environment, in the aftermath of COVID-19, on other rating factors.
In particular, earnings are likely to come under pressure and the GCR leverage ratio is expected
to deteriorate as a result.
Detailed Rating Report available at www.finbondlimited.co.za
For and on behalf of the Board
Dr Malesela Motlatla Dr Willem van Aardt
Pretoria
21 July 2020
JSE Sponsor: Grindrod Bank Limited
Date: 21-07-2020 11:05:00
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