Letshego’s profit before tax declined by 85 percent, and when factoring in taxes, it placed Letshego into a loss-making position. Despite this, Monyatsi is not concerned about the dip in profitability because the business fundamentals remain strong.
He points to the top of Letshego’s balance sheet and profit and loss statement, which he says depict a company far from distress. Among the key performance indicators are net customer advances and the company’s core product, the Deduction at Source (DAS). Loans and advances grew by 7 percent to P13.4 billion, compared to the P12.6 billion realised in the previous corresponding period. Monyatsi, who made a presentation alongside his Chief Finance Officer Gwen Muteiwa, attributes this growth to the strong performance of their core products.
Leading the pack among core products was the DAS, which accounts for over 80 percent of the total Letshego loan book of P13.4 billion. Monyatsi emphasises that the DAS product itself realised a 5 percent growth in the 2023 reporting period.
Additionally, he highlights the mobile phone operators’ loan book. Under this product, Letshego partnered with mobile network operators like MTN and Orange Money to facilitate easy access to short-term loans, particularly. Monyatsi and his CFO note that this product contributed P803 million to Letshego’s loan book in the 2023 reporting period. The two Letshego executives are excited by the fact that mobile loans grew by 90 percent from the P421 million seen in the 2022 reporting period, indicating a growing appetite for such a product.
“The good thing about this product is that it’s a short-term product of 30 days, less risky and has higher margins than longer-term loans. We expect significant growth from this product,” Monyatsi explains.
Letshego also considers its customer deposits and insurance revenue as core components of its product offerings. By focusing on mobile lending and insurance revenue, Letshego aims to diversify its revenue streams.
In terms of mobile loan performance, Letshego operates in 8 African markets and has partnered with 11 fintech/Mobile Network Operators (MNOs). As for its insurance offerings, Letshego offers six product types and has issued over 105,000 policies.
Customer deposits amounted to P1.5 billion, marking a notable 37 percent increase, while income from insurance products reached P363 million, showing a robust growth of 46 percent.
Deposits were garnered through Letshego’s commercial banking subsidiaries, namely Letshego Bank Namibia and Letshego Bank Tanzania.
Letshego is also proud of the performance of traditional markets like Botswana and Southern African markets, which have shown strong results from a top-line perspective. In 2022, financial analysts expressed concerns that Letshego should be cautious not to deviate from its core product, which is the deduction at source. Letshego reports that upon closer examination of the 2023 results, the company has regained traction in the deduction at source market segment and has observed growth in that area.
A market like Mozambique did phenomenally well when it comes to the deduction at source product, says Monyatsi and Muteiwa. This is on the back of a tough macroeconomic environment and changes in regulatory capital requirements. Basically, Letshego’s core market in Southern Africa continues to do well.
Turn Around Markets & Accounting provisions
In 2022, Letshego spoke about looking at East and West Africa and decided to come up with a very good plan for trying to penetrate that market. There has been good progress, Letshego executives say. A key market to look out for is Ghana which has tripled its profit before tax in 2023. Unfortunately, the profitability was eroded by the hyperinflation declaration towards the end of last year.
Letshego says Nigeria also did extremely well in profitability, in local currency. However, 2023 has been an emotional mix-bag. Notwithstanding the strong business fundamentals like a good book and revenue, some extraordinary items led to the bottom like depression.
In 2023, Letshego notes that it had a conversation with its auditors. The auditors said as per the IFRS, when Letshego calculates Expected Trade Losses (ETLs) they need to discount loans for provisions of a risk at every stage of the life of the loan, stages one to three, with stage three being the oldest stage and stage one being the earliest in delinquencies. Letshego says it has been discounting as per the IFRS, but Ernst & Young came and said while technically, Letshego was not wrong, they believed that at stage three Letshego should apply a 0 percent discount, instead of applying a certain number as a discount, and gave their reasons for that.
While Letshego management differed in opinion, auditors stood their ground and would not sign off the financials unless their view was considered. By not discounting the loans at stage three, which Letshego traditionally used to discount, it took a hit that affected its bottom line.
Another extraordinary item is that when the audit firm declares a country to be hyperinflationary, it does not apply only to one company but to the entire sovereign.
In 2023, EY decided that Ghana would be treated as hyperinflationary. “What that means is that you take the entire Ghana loan book and provide an element of doubt, to say whatever value is there will be eroded by the hyperinflation. This means that Letshego applied a certain percentage discount on the Ghana balance sheet,” explains Monyatsi.
The hyperinflation discount landed a blow on Letshego because, in Ghana, profit before tax had tripled, looking at constant currency. The Institute of Chartered Accountants in Ghana was against EY’s declaration of Ghana as hyperinflationary and so was the Bank of Ghana according to the microfinancier’s executives. But Letshego pronounces that it had to effect what auditors are saying. The situation is not unique to Letshego, so they say, it applies to the entire business landscape.
Currency fluctuations are also another one-off item that affected Letshego. African countries saw currency volatilities against the US Dollar which affected Letshego negatively. While some countries may have performed well, the value accrued from those markets declined when the money was converted to Pula.
A backlog of unsettled forwards, undelivered promises of dollar inflows and a two-decade peak in inflation have translated into a tumultuous year for the naira, which has lost over 50 percent of its value to become the third worst-performing global currency in 2023.
The naira’s downward momentum is likely to continue through much of 2024, and its ultimate trajectory will depend on whether the CBN’s rhetoric transforms into concrete policy moves that drive up the flow of U.S. dollars into Nigeria and shore up trust in the official market.
Botswana’s Individual lending product
Letshego’s core product is the deduction at source, which is made possible by the availability of a government deduction code in any market. To Letshego, there has always been anxiety over the reliance on this product. What if tomorrow government decides to withdraw the deduction code? Letshego would wonder. This led to the microfinancier innovating further and launching what they call individual lending in Botswana. This is basically a lending product without a deduction code, which was to ensure that in the unlikely event that Letshego loses its deduction codes, the business remains sustainable. Individual lending was iterated in 2021 and was scaled in 2022. Letshego had to observe the product perform through its cycle from disbursement. This is because through the cycle Letshego wanted to observe certain elements that may need scorecards to be tightened to refine the product.
In 2023 however, the product’s collections rate deteriorated. Letshego established that because they do not take deposits in Botswana, what happened was that should their debit not meet the payment date, other stop orders would be deducted and by the time Letshego wants to deduct, the funds would have been used elsewhere.
“And this was not an affordability issue. As an example, when salaries reflect, banks easily deduct their money because they can observe and even see the pay dates. On our side, we do not have any relationship with corporates, so lack of alignment with paydates was our biggest challenge,” Monyatsi said.
The Individual lending book had grown to over P500 million. Monyatsi said they have stopped this product while still trying to find a solution around its challenges. In the meantime, they have scaled up collections and engaged third parties to also help them collect. However, some individuals are paying consistently.
High Costs of Borrowing
As a result of the high-interest rate environment, Letshego experienced an increase in the cost of funding. Letshego’s net interest income grew at a pace slower than the interest expenses.
When Letshego’s funders increase interest rates when they borrow to finance their loan book, the executives say it is impossible for Letshego to increase the rates likewise on their loanbook unless the customers get a top-up loan. Otherwise, most will still pay the legacy lower interest rates. Getting a loan top-up is also a process that takes months.
By deposit taking, financiers are able to save enough to fund their loanbook cheaply unlike Leshego which does not do deposit-taking in its core markets. So any interest hike is a challenge to Leshego.
“The good thing is that Letshego’s auditors are being hyperprudent. Going forward if Letshego intensifies its collections, looking at the size of the Individual lending book, will have positive results. Further, looking at the quantum of the EY extraordinary items, which are one-off, obviously in 2024 Letshego profitability will bounce back,” they say.
With regard to turnaround markets, Letshego is on track to make decisions on whether to change strategies in order to minimise risks and maximise returns.
