Letshego banks on digitalisation to remain resilient

Ratings agency Moody’s has affirmed Letshego’s resilience by keeping the group’s credit rating unchanged at Ba3 with a stable outlook

Letshego banks on digitalisation to remain resilient

Although Letshego has experienced a measured downside impact as a result of slowed transaction volumes in pandemic conditions, the group’s CEO, Andrew Okai, says the business remains resilient.

The board expects that a W-curve response to the COVID 19 pandemic will persist, with potential and varying stages of lockdowns continuing as governments and national health departments seek to reduce spiking rates of infection in local populations.

In the second half of 2020, Okai says because Letshego is making progress in implementing the group’s transformational strategy alongside the concurrent execution of effective pandemic plans, the Group is confident of the business’ ability to maintain resilience throughout ongoing pandemic conditions, managing risk and supporting the potential upside of new business flows via its digitised channels.

Even so, pandemic conditions and lockdown scenarios across Letshego Holdings’ regional footprint had a direct impact on transaction volumes, as forecast in the group’s COVID-19 Update made available to all stakeholders on 5 May 2020.

In the six months ending June 2020, proft before tax decreased by 20 percent from the prior period, while profit after tax decreased by 24 percent. Year-on-year, net interest income (NII) saw a single digit decline of 6 percent to P973 million, from P1, 037million in the same period last year.

With almost two months of trading lost to pandemic lockdowns, as well as the longer term impact of Letshego’s adjustment in affordability criteria (implemented at the end of 2019), the group’s chief executive Okai says they consider the single digit decline to be above expectations. “A measured recovery of business momentum was experienced in the second quarter,” he notes. “However, margin compression remains a reality in most of our markets.”

Borrowing costs decreased by 20 percent year-on-year as the group continued its focus on retiring expensive borrowings and diversifying funding sources. Had the notional IFRS adjustment for mobile loans of P79 million (H1 2019: P137 million) been excluded from borrowings, Okai says the year-on-year decrease would have been 11 percent. “The group remains committed to diversifying its funding base and reducing foreign currency risk by securing improved rates in local funding across its operations,” he says.

Non-funded income saw a steep decline of 51 percent year on-year-due to tougher economic conditions as a result of the pandemic, as well as adjustments to regulatory policy in Namibia. According to the group, the impact was especially visible on income from insurance arrangements, which makes up 46 percent of other operating income (H1 2019: 62 percent). Okai says this came down by 63 percent year-on-year as a result of a change in legislation in Namibia which resulted in the existing insurance arrangements being revised in October 2019 to meet new statutory requirements.

“The Namibian subsidiary has since reviewed and adapted its loan structures to accommodate the regulatory adjustments, and continues to implement strategies to support longer term volume growth and volumes, despite narrowed loan margins,” the CEO notes.

Overall costs increased by 1 percent from prior year, with employee costs increasing 12 percent year-on-year, reflecting one-off exit costs. Other operating costs decreased by 6 percent as cost management efforts continued, coupled with reduced spending on historic expense lines due to support for COVID-19 lockdowns. “As expected, Letshego’s effective execution of our pandemic planning saw Covid-19 related expenses at P7.5 million,” says Okai. “This includes donations to national Covid-19 relief efforts totalling P3.4 million, and C-19 operating expenses of P4.1m.”

The group’s cost to income ratio was 49 percent, up from 41 percent in the prior period. This increase is primarily due to lowered operating income in the pandemic. Okai says the group remains well capitalised with a capital adequacy ratio of 37 percent (FY2019: 36 percent), well above the regulatory minimum in all presence markets and further supported by the group’s debt to equity ratio of 106 percent (FY2019: 110 percent). To-date the group says it has managed to mitigate the extreme downside impact of Covid-19 on liquidity with limited adverse effects on operations during the reporting period.

“Significant progress continues to be made in the diversification of the group’s funding base, and in the extension of the duration of liabilities to mitigate liquidity risk.” Okai says.

According to the CEO, borrowing at a subsidiary level is also being increased across the group to take advantage of local liquidity pools and effectively reduce exposures on cross-border transactions.

Meanwhile, ratings agency Moody’s has kept Letshego Holdings Limited credit rating unchanged at Ba3 with a stable outlook. This is a valued third party accreditation for the group, given current economic conditions as a result of the pandemic.