GCR Affirms LAPO Microfinance Bank Limited’s National Scale Rating of BBB+(NG); Outlook Stable
Lagos, 17 February 2020—Global Credit Ratings has affirmed LAPO Microfinance Bank Limited’s public national scale ratings of BBB+(NG) and A2(NG), in the long and short term respectively; with the outlook accorded as Stable. The ratings are valid until October 2020.
RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings based on the following key criteria:
The ratings accorded to LAPO Microfinance Bank Limited (“LAPO Mfb” or “the bank”) were supported by its strong competitive position as one of the dominant players in the Nigeria microfinance banking space (accounted for around 16.2% of the industry total assets at 31 December 2018), strong capitalisation, stable funding and adequate liquidity, partly offset by the degenerated risk position.
LAPO Mfb has sustained strong capitalisation metrics in the five year period to FY18. Internal capital generation saw the bank’s total shareholders’ funds grow 11.1% to N17.9bn at FY18, translating to a risk weighted capital adequacy ratio of 28.5% (surpassing the 10% statutory floor by a wide margin and translating to 3.5x the new minimum capital for the bank’s licence category). Management’s plan to further recapitalise the bank in the immediate future is likewise considered positive.
LAPO Mfb’s financial performance was constrained by revenue decline and uptick in both impairment charge and operating expenses in FY18. Specifically, the extension of the Bank Verification Number requirement to the microfinance banks by Central Bank of Nigeria resulted in a slowdown in MFBs activities in the early part of FY18. Consequently, total operating income (“TOI”) declined 3.8% to N26.3bn. Impairment charge and operating expenses grew by 4.5% and 2.3% respectively, eroding pre-tax profit to 72.3% of the FY17 level. Performance was fairly in line with budget at the pre-tax level in the nine-month period to 30 September 2019. Although TOI lagged budget by annualised 15.4%, favourable variance in operating expenses augmented performance at the pre-tax level to 96.2% of the full year budget.
LAPO Mfb, as with other peers, is vulnerable to the tough macro-economic condition in Nigeria, recording a 130 basis points rise in non-performing loans ratio to 9.8% at FY18. However, arrears coverage is considered satisfactory, with the net NPLs to capital ratio standing at an acceptable level of 4.2% at the balance sheet date.
Liquidity risk appears well managed, with LAPO Mfb’s key liquidity metrics comparing favourably with regulatory requirements. In particular, LAPO Mfb’s statutory liquidity ratio ranged from 26% to 53% throughout FY18 (ending the year at 28%), compared to the 20% statutory benchmark. The matching of the bank’s assets and liabilities maturities at FY18 showed good liquidity buffer across the within one year’s maturity bands, with liquidity buffer amounting to N12.6bn in the most critical less than three months maturity band. Additionally, stable funding in the form of equity and member deposits further lessens liquidity risk.
A satisfactory improvement in the bank’s asset quality position and financial performance could trigger a positive rating action. However, a negative rating action may follow a significant deterioration in asset quality and profitability.
NATIONAL SCALE RATINGS HISTORY
Initial rating (July 2017)
Long-term: BBB+(NG)
Short-term: A2(NG)
Rating outlook: Stable
Last rating (December 2018)
Long-term: BBB+(NG)
Short-term: A2(NG)
Rating outlook: Stable
ANALYTICAL CONTACTS
Primary Analyst
Julius Adekeye
Senior Credit Analyst
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Committee Chairperson
Dave King
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APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2017
Global Criteria for Rating Microfinance Institutions, Updated 2017
Glossary of Terms/Ratios, February 2016
RATING LIMITATIONS AND DISCLAIMERS
ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.COM.NG/UNDERSTANDING-RATINGS. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT HTTP://GLOBALRATINGS.COM.NG/RATINGS-INFO/RATINGS-SCALES-DEFINITIONS. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT WWW.GLOBALRATINGS.COM.NG
SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
The ratings were solicited by, or on behalf of, LAPO Microfinance Bank Limited, and therefore, GCR has been compensated for the provision of the ratings.
LAPO Microfinance Bank Limited participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of info received was considered adequate and has been independently verified where possible.
The credit ratings above were disclosed to LAPO Microfinance Bank Limited with no contestation of/changes to the ratings.
The information received from LAPO Microfinance Bank Limited and other reliable third parties to accord the rating included the audited annual financial statements of LAPO Microfinance Bank Limited for five years, up to 31 December 2018, the unaudited management accounts for nine months (up to September 2019), and other detailed information related to the bank’s operations.
ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.COM.NG/UNDERSTANDING-RATINGS. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT HTTP://GLOBALRATINGS.COM.NG/RATINGS-INFO/RATINGS-SCALES-DEFINITIONS. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE UNDERSTANDING RATINGS SECTION OF THIS SITE.