While Letshego has had to contend with high costs of funding resulting from COVID-19 propelled interest rates in most of its markets, management says the strong balance sheet of the Group means the company remains profitable overall Letshego Holdings Limited will spend the next few months battling to bring its cost of funding down as interest expenses weigh in on profits.
“The issue here is that if your interest expense goes up, it really puts a damper on profits,” said Letshego Group Chief Financial Officer, Gwen Muteiwa, at the presentation of Letshego full-year financials on Thursday. For the period under review, the pan-African financial services group incurred interest expenses amounting to P130 million that Muteiwa said is due to floating rate facilities. “The issue of a floating facility is that when the (central) bank changes the rate, costs go up,” she noted. “And for us is P130 million. “
“So you can immediately say that there was a P130 million hit on our numbers which we could not necessarily control. “When you have these types of facilities, as soon as the bank says the central bank has raised the rates, they also raise rates on us and so our costs go up.” However, Muteiwa said, Letshego is not just sitting back and doing nothing about the current situation. “One of the things that make us different from commercial banks is that they have access to cheap funding,” he added. “They have a cheap cost of funds.”
Infact, Letshego has brought in a Treasure who will focus on containing the high costs of funding for the next coming months. One of the ways that Letshego looks to bring the costs down is to increase retail deposits. “For the next four months, we need to increase our retail deposits so that our costs of funds come down and then we can see how can reduce the interest expenses,” Muteiwa said.
This, he added, will be a focus area for Letshego. “The main focus will be, how we increase our retail deposits so that we reduce our cost of funds,” she said. During the period under review, Letshego had to contend with rising bank rates in most of the markets it operates in as central banks raised rates to contain rising inflation. “Some markets had higher interest rates than others,” she noted. “Mozambique had a 4 percent increase, which obviously increases our interest expense. Uganda had a 3.5 percent increase.”
In Ghana, interest rates reached 18.8 percent. “An increase in interest rates will increase our cost of funds as a result because most of our funding is of that nature where we have to reprice,” Muteiwa said. Overall, she added, there was a P260 million increase in interest expenses, P130 of which had to do with these rate increases that Letshego did not have any control over. However, she noted that Letshego has a clear strategy around retail deposits and how to dilute the cost of funds. Letshego deposits consist of retail and corporate deposits, and it is the former that it seeks to increase.
For the period under review, Letshego retail deposits grew by 27 percent while corporate deposits came down by 24 percent. “Our corporate deposits came down because they became more expensive, but we want to increase our retail deposits, which is what we really want,” she said. From a strategic perspective, Muteiwa stressed that Letshego is clear that it wants the retail deposits.
“If we get cheap funding, we can also give cheaper funding to our customers,” she said, pointing out that as the cost of funds comes down, it will allow Letshego to pass the benefits to customers. Letshego, according to Muteiwa, will start to pick up deposits in Ghana, though cautiously as that market has previously proven to be expensive. “We are clear that it can’t be expensive,” she said. “Namibia is a good source of deposits, and Mozambique too.
“If you look at Nigeria, Rwanda, and Tanzania, they have very small businesses but they have not been pushing deposits enough. “We are very clear about what we want to do with those three entities, together with Uganda which has gotten a licence now.” Muteiwa said Letshego is comfortable with its debt-to-equity ratio, which is at 142 percent. “Our business is funded by a mixture of debt and equity,” she pointed out. “So we are comfortable that at 142 percent, we have a decent mix.”
Muteiwa emphasised that the business is in good shape despite the interest expenses. “If you add our interest expenses back to the P800 million profit that we made, you will actually see that we are kind of breaking even,” she said. “There were a lot of external extenuating circumstances that we experienced.” In addition to trying to bring the cost of funding down, Letshego is looking to grow its East and West African markets.
Ghana, Kenya, Rwanda, Tanzania, and Nigeria have been clustered as turnaround markets with potential for growth. According to Letshego Group Chief Executive, Aupa Monyatsi, the macroeconomic performances in these countries dragged the overall performance of the group down. “That is sometimes the burden of having the footprint that we have,” he said. “In Tanzania, we have two businesses. We have a microfinance called Faidika and Letshego Bank Tanzania.”
Monyatsi said Letshego has been struggling in this market for the longest time because one business has been loss-making and another making profit with good capital. “We struggled for years to merge these two and create a single entity that is formidable in Tanzania,” he noted. Monyatsi revealed that Letshego now has all the necessary approvals to merge these two entities. “This will put us in a very good position to turn around the Tanzania market and make it profitable,” he said.
He revealed that at half-year, Nigeria was a loss-making business that never made a profit. However, he added, by the close of 2022, Nigeria made a profit for the first time. “You will remember that we had a franchise in Rwanda that several years ago Letshego was contemplating selling because it has been loss-making,” he said, “but by the time 2022 closed, Rwanda had turned a profit.” Although the Ghanaian market has dipped, Monyatsi said the actual matter is that this market is not loss-making.
“We are still profitable in Ghana, although the profit has dipped due to macroeconomic headwinds,” Monyatsi said. The problem, he added, is that there is a huge difference between 2021 and 2022 profits but Ghana remains a profitable entity nonetheless. But because of the strong balance sheet of Letshego, Monyatsi noted, the Group remains profitable overall.