Moody’s keeps Letshego outlook “stable”
• The company currently has operations in 11 sub-Saharan countries, with a strong niche franchise within Botswana Namibia and Mozambique
Pursuant to the terms and conditions of the Letshego Holdings Limited ZAR2,500,000,000.00 Medium Term Note Programme, noteholders have been advised that Moody’s Investor Service has affirmed that the group’s current Ba2 Corporate Family Rating (CFR) and Ba3/Not Prime Issuer Rating remain unchanged and the Group’s outlook “stable.”
The rating action is in line with the publication of Moody’s Finance Companies rating methodology issued on 10 December 2018.
According to Moody’s, the Ba3/Not Prime Issuer Rating assigned to Letshego captures the company's solid capitalisation and profitability, supported by its niche, low-cost, franchise. It also captures Letshego's growing diversification across regional countries, which makes the company more resilient to any adverse change in any one of its operating markets.
Moody’s says the rating balances these strengths against Letshego's narrow, albeit gradually diversifying, business model, with a high reliance on payroll deductions for loan repayment collections, high exposure to foreign exchange risk, elevated asset quality risks, and dependence on market-sensitive wholesale funding but notes that actions are being taken to address this weakness.
“The Ba3 Issuer Rating assigned to Letshego reflects its stand-alone credit profile. No external support has been imputed in Letshego's rating, given its limited importance to Botswana's (A2, Stable) payment system on account of its small scale, and given that it does not have any material customer deposits,” the rating agency wrote, adding that an upgrade of the company's rating would depend on Letshego successfully developing broader African financial services operations while maintaining strong profitability and capitalisation and strengthening its liquidity profile.
Further, the agency says negative rating pressure could be exerted on Letshego's rating if regional authorities in the company's main operating markets change the terms of, or impose restrictions on, the deduction (at source) of loan repayments from the wages of public sector employees, leading to a sharp rise in bad debts and impairment costs. In addition, negative pressure could be exerted on the rating if Letshego's expansion in other sub-Saharan markets, client segments and products result in a material weakening of asset quality and profitability metrics or if Letshego's capitalisation metrics were to materially weaken.
Letshego has a niche franchise specialising in unsecured loans to government and quasi-government employees under a payroll deduction model (around 68 percent of total loans). Under this model, loan repayments are taken directly from the employer prior to distribution of monthly salaries. Letshego’s business model benefits from a quick and efficient loan-approval and disbursement process and has historically led to fairly low credit costs and strong profitability.
However, at the same time, Moody’s says its concentration to the product exposes the company to adverse developments in the regulatory and legal framework that may either hamper the payroll deduction process and/ or impose or lower caps on the effective interest rate the company can charge on loans.
To counter these risks, Moody’s observed that Letshego has been increasing its geographical diversification and has a strategy to diversify its business model by becoming a pan-African financial services company. As part of this strategy it has completed various acquisitions across Africa, has acquired banking and deposit taking licences in several territories (it has a deposit-taking licence in Ghana, Mozambique, Rwanda, Tanzania, Nigeria, and Namibia) and aims to convert its loan-only clients into transactional clients.
The company currently has operations in 11 sub-Saharan countries, with a strong niche franchise within Botswana (where it offers payroll loans to around 20 percent of all government employees as of June 2018), Namibia (51 percent of government employees), and Mozambique (22 percent of government employees). Outside these three markets, Letshego currently exhibits a lower franchise sustainability, given its weaker brand name and lower market penetration.