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Rating action

Scope Ratings has today assigned a first-time issuer rating of B to JSC MFO Swiss Capital. The rating has a Stable Outlook.

Rating rationale

The rating on Swiss Capital reflects its strong market position in its domestic microfinance sector with a business model focused on domestic consumer micro lending.

Although recent regulatory changes have put pressure on the sector´s returns, Swiss Capital’s bottom line profitability has proved resilient, allowing for organic capital formation. The MFO’s capital and liquidity ratios are comfortably above requirements.

Swiss Capital’s loan book is almost entirely collateralised but asset quality metrics are comparatively weak. The change in provisioning rules under National Bank of Georgia and IFRS9 accounting standards has significantly increased coverage levels across the board. However, Swiss Capital’s margins and focus on cost control have adequately shielded profits.

As MFOs in Georgia are prohibited from attracting deposits, Swiss Capital’s profile combines secured bank funding with a decreasing share of funds from individuals. Scope views positively Swiss Capital’s access to the wholesale market with a senior debt issuance in 2019.

Scope’s analysis of Swiss Capital provides the following rating drivers:

• One of the top MFOs in Georgia, with a business model supporting margins which are higher than peers’
   
• Comparatively weak asset quality metrics for an almost fully collateralised portfolio with adequate coverage
   
• Mostly reliant on secured bank funding, but capital and liquidity metrics are comfortably above requirements

Rating-change drivers

• Beyond the short-term impact of the economic slowdown caused by the Covid-19 pandemic on Swiss Capital’s profitability, Scope would view negatively a weakening of credit fundamentals driven by a more prolonged recession in Georgia.
   
• Improvement in asset quality: Management’s intention to increase the share of collateralised micro business and dispose of the remaining share of uncollateralised consumer loans should help improve asset quality.
   
• Downward pressure on profitability from increased cost of funding: The larization plan has resulted in Swiss Capital’s increasing reliance on domestic currency funding from commercial banks. This is typically tied to the National Bank of Georgia’s main refinancing rate. Any tightening of conditions would therefore probably be reflected in increased funding costs, which are comparatively low at present.

Stress testing & Cash flow analysis
No stress testing was performed. No cash flow analysis was performed.

Methodology
The methodology used for this rating and/or rating outlook Rating Methodology Bank Ratings, published 4 May 2020 is available on https://www.scoperatings.com/#!methodology/list.
Information on the meaning of each rating category, including definitions of default and recoveries can be viewed in the “Rating Definitions - Credit Ratings and Ancillary Services” published on https://www.scoperatings.com/#!governance-and-policies/rating-scale. Historical default rates of the entities rated by Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. Please also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s definitions of default and rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale. Guidance and information on how Environmental, Social or Governance factors (ESG factor) are incorporated into the rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.
The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The rated entity and/or its agents participated in the rating process. The following substantially material sources of information were used to prepare the credit rating: public domain, the rated entity and the rated entities’ agents.
Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. The information and data supporting Scope’s ratings originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Prior to the issuance of the rating or outlook action, the rated entity was given the opportunity to review the rating and/or outlook and the principal grounds on which the credit rating and/or outlook is based. Following that review, the rating was not amended before being issued.

Regulatory disclosures
This credit rating and/or rating outlook is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst Chiara Romano, Senior Analyst
Person responsible for approval of the rating: Dierk Brandenburg, Managing Director
The ratings/outlooks were first released by Scope on 12 June 2020.

Potential conflicts
Please see www.scoperatings.com for a list of potential conflicts of interest related to the issuance of credit ratings.

Conditions of use / exclusion of liability
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