Letshego’s deposit taking strategy is at the core of its diversification programme. The group is hunting for deposit taking across all its markets. CEO Andrew Okai has emphasised the importance for the group to build a base of its own deposits to support the funding and rein in costs.
“I can already say that in a couple of the markets where we don’t have deposit taking today, our plans are far advanced and we are hopeful that we should be at least two more markets on stream by the end of the day,” Okai said, hesitating from disclosing the names due to regulatory constraints. But he expects that the group will have deposit taking licences, hopefully by the end of Plan 2 or into Plan 5. “It is our desire that all our markets will have deposit taking.”
During the first half of 2021, Letshego’s deposits grow by 98 percent to P989 million. This was attributed to the group’s digitised payment capabilities (USSD, Cards, Agency & Community Commerce) and deepening strategic partnerships. A good traction came in through from Tanzania, Mozambique, Ghana and Namibia, which contributed about 95 percent to the group’s total deposits, according to Gwen Muteiwa, Group Chief Finance Officer.
Letshego is still on a journey to increase deposit seeking capabilities which should contribute to cost of funds reduction. Letshego reported a 90 percent growth in new deposits of customers feeding into its diversification strategy. Muteiwa indicated that the cost has decreased by 2 percentage points year-on-year from around 15 percent to 13 percent as at 30 June 2021.
In terms of pricing, Letshego pays on deposits, particularly in the countries where the group is not listed. Okai said this is the only way they can attract deposits. “We benchmark ourselves to pay below our cost of funds in every country,” he said, emphasising that “the deposits are also good as they bring cost of funds lower than we will be attracting when we get wholesale funding”.
Asked whether there was competitive pricing that could have influenced the spike in deposits, Okai answered: “We are not growing because we pay higher. It’s because we have a limit and the limits of our deposit is our cost of funds.” As cost of funds decrease, he explained, the limit also will drop. So fundamentally, he said it is about the branding and about providing transactional capabilities which will be increased exponentially as the group expands the capabilities on the digital mall. “That, fundamentally, is the driver of why our deposits are growing,” Okai said
Because Namibia, Ghana and Mozambique had traditional deposit taking, Okai believes the group has a certain level of brand equity in those markets. A key issue is also that Letshego said customer numbers have been increasing. One of the things that Okai said customers have always told them is that they would prefer a one-stop shop.
“As we’ve launched some basic products in Mozambique, for instance, we have a partnership with MasterCard, which is driving deposit taking, and therefore that is something that we were using,” he said. In 2019, Letshego stripped out many of the expensive deposits the group had.
Letshego’s balance sheet has increased by 25 percent to P13.3 billion as customer deposits grew in pursuit of the strategy to diversify the company’s funding base and to reduce cost of funds. Debt to equity ratio was 190 percent, which was well within the group’s risk appetites. “This target is in line with the nature of our operations,” Muteiwa said. The business model is to increase debt in line with the fact that the group is in a growth phase of the business. The five-year strategy is premised on the fact that there will be growth in debt and this will continue. “And this compares very nicely with our competitors as well,” Muteiwa said, adding that as a deposit strategy kicks in “we’re able to diversify our funding base over time and we’ll see the debt equity ratio coming down”.
That notwithstanding, she said Letshego has seen some interesting trends beginning to form on its trend of funding. Traditionally, the group had a challenge with the bulk of its funding that was under a one-year bracket. This obviously would have caused tremendous pressure to the group over the years. However, Muteiwa said they have diversified funding as at 30 June 2021. Letshego is now at 61 percent of its funding being beyond one year. Last year this time, the measure was 16 percent.
“So this is a great milestone for us and really is pleasing for us,” she said. “It allows us to also assist our MSEs and our business as a whole. Our funding strategy is well underway and the DFIs have extended tenors and we’re making good progress in securing long term debt.”
The CFO said the banks have been very supportive as well over the last six months. About 41 percent of funding is now greater than three years. “We have a good pipeline and we’re working well with our funders to roll over our facilities and to explore new opportunities around funding,” Muteiwa said.
Letshego’s total borrowings increased by 22 percent to P5.9 billion (H1 2020: P4.8 billion) for the half-year period, comprising bank loans, development finance institution funding and bonds. Diversifying funding mix remains a key stream within Letshego’s overall de-risking strategy, with the proportion of total funding from commercial banks reducing from 41 percent to 38 percent from 31 December 2020, the group revealed.
Bonds and DFI funding contributions increased in the period, with Namibia raising NAD231 million through its inaugural bond issuance in May 2021. Letshego said progress in increasing local currency borrowing contributed to reducing concentration and foreign exchange rate risks. With customer deposits nearing the P1 billion mark, the group expects to gain another lever in reducing funding costs.
