Moody's upgrades Letshego outlook
Brian Benza | Thursday December 12, 2013 17:06
In a statement, the renowned credit rating agency upheld Letshego’s prime issuer ratings and changed the outlook to stable from negative. Letshego’s outlook and ratings was downgraded by Moody’s two years ago when government indicated its intention to stop the company’s direct payroll deduction for public servants.
“The primary driver for the rating upgrade is Moody’s assessment of a lower likelihood that the authorities in Botswana will impose restrictions on the company’s payroll deduction model.
“On the other hand, Letshego’s increasingly resilient credit profile and increasing geographic diversification, provides a buffer against adverse changes to the regulatory and legal framework in the countries in which it operates,” said Moody’s.
In the past three years, Letshego has embarked on an aggressive geographical expansion, which has seen it becoming a Pan-African operation with a presence in 11 African countries.
The expansion has resulted in Botswana contributing around 40% of loans and profits as of July 2013, down from around 60% less than two years ago.
In de-risking the business through diversification, Letshego is also branching into commercial banking with steady progress already recorded in the strategy to acquire banking licences in its main operating markets.
Letshego has already acquired banking licences in Mozambique, a deposit-taking licence in Rwanda, and is in the process of acquiring a banking licence in Namibia.
Moody however says Letshego’s ratings remain constrained by the company’s narrow business model, with a high reliance on payroll deductions for loan repayment collections that expose the company to potential regulatory and legal changes, and high exposure to foreign exchange risk.
Going forward, Moody says an upgrade on Letshego’s ratings would be dependent on the company’s ability to successfully develop banking operations in its main operating markets, while maintaining strong financial performance, including profitability, asset quality and capitalisation. Moody’s expects banking operations to help diversify Letshego’s funding profile, strengthen its overall franchise and enhance the regulatory and supervisory framework where it operates.
On the other hand, negative rating pressure could be exerted on Letshego’s ratings if regional authorities in the company’s main operating markets impose restrictions on the deduction (at source) of loans and other repayments from the wages of public-sector employees, leading to a sudden rise in bad debts and impairment costs.
“In addition, negative rating pressure could be exerted on the ratings if Letshego’s expansion in sub-Saharan markets results in any material weakening of asset quality, profitability and capitalisation metrics,” said Moody’s.
In its unaudited six months financial results for the period ended 31 July 2013, the group’s advances to customers increased by 22%, attributed to significant contributions from Botswana, Namibia and Mozambique.
Operating and staff costs increased by 30% to P181 million compared to P138 million in the prior period.