Rating action

Scope Ratings UK Ltd (Scope) has today affirmed its issuer rating of B for JSC MFO Swiss Capital with a Stable Outlook.

Rating rationale

The affirmation reflects Scope’s view that the credit profile of Swiss Capital has remained resilient despite the economic impact of the Covid-19 pandemic.

The rating is driven by Swiss Capital being one of the largest Georgian microfinance organisations, with a stable market share and a well-collateralised portfolio.

Swiss Capital benefits from a strong profitability. The company was able to grow and even outperform the Georgian microfinance sector in an exceptionally difficult domestic operating environment. Its RoAE and ROAA were respectively 16.5% and 7.5% in 2020 versus the sector’s 9.3% and 3.2%.

Swiss Capital’s asset quality metrics have remained close to pre-pandemic levels, with a 14.9% Stage 3 ratio as of Q1 2021.

Solvency and liquidity metrics continue to be reassuring. The capital adequacy ratio stood at 42.7% compared to the minimum requirement of 18% and the liquidity ratio amounted to 37.4% of total liabilities (+19 pp above the requirement) as of December 2020.

As microfinance organisations in Georgia are not authorised to collect deposits, Swiss Capital’s funding relies heavily on larger Georgian banks, which could lead to a potential funding risk. Swiss Capital issued its first local corporate public bond in late March 2019 amounting to GEL 10m.

Under Scope’s bank rating methodology, the ‘long-term sustainability’ assessment (ESG factor) captures how relevant environmental, social and governance (ESG) factors and preparedness for digital transition (D) may impact an issuer’s creditworthiness. As part of the first-time implementation of this methodology, Scope assesses Swiss Capital as ‘lagging’ due to the material room for improvement in its environmental and social factors. Scope acknowledges that governance has improved with the streamlining of the corporate structure.

One or more key drivers of the credit rating action are considered an ESG factor.

 Rating-change drivers

The Outlook is Stable and reflects Scope’s view that Swiss Capital’s performance will remain resilient in 2021. The expectation of an improving operating environment in Georgia further supports this view. Scope expects earnings to be sufficient to absorb potential credit losses.

What could move the rating up:

• A refocus of lending towards lower-risk business (e.g. business loans) and less penetrated segments (e.g. agro loans); a market share increase that does not increase credit risk
   
• A broader funding diversification policy that allows additional layers of safer and more predictable funding inflows (e.g. customer deposits in case of a future regulatory regime for microbanks)

What could move the rating down:

• 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, which 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, from a comparatively low level, putting pressure on interest margins.
   
• Material deterioration in the portfolio’s credit quality 

Overview of the rating components

• Operating environment: Constraining
   
• Business model: Focused
   
• Initial mapping refinement: Low
   
• Initial mapping: b-/b
   
• Long-term sustainability: Lagging
   
• Adjusted anchor: b-
   
• Earnings capacity and risk exposures: Supportive
   
• Financial viability management: Adequate
   
• Additional rating factors: Neutral factor
   
• Standalone assessment: b
   
• External support: Not applicable
   
• Issuer rating: B

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

Methodology
The methodology used for this Credit Rating and Outlook, (Bank Rating Methodology, 26 January 2021), is available on https://www.scoperatings.com/#!methodology/list.
Scope Ratings GmbH and Scope Ratings UK Limited apply the same methodologies/models and key rating assumptions for their credit rating services, while Scope Hamburg GmbH’s methodologies/models and key rating assumptions are different from those of Scope Ratings GmbH and Scope Ratings UK Limited.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions - Credit Ratings, Ancillary and Other 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 Credit Rating performance report at https://www.scoperatings.com/#!governance-and-policies/regulatory-UK. A comprehensive clarification of Scope Ratings’ definitions of default and Credit 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 factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.
The Outlook indicates the most likely direction of the Credit Rating if the Credit Rating were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Rating: public domain, the Rated Entity, third parties and Scope Ratings’ internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting the Credit Rating originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Rating and Outlook and the principal grounds on which the Credit Rating and Outlook are based. Following that review, the Credit Rating was not amended before being issued.

Regulatory disclosures
This Credit Rating and Outlook is issued by Scope Ratings UK Limited at 111 Buckingham Palace Road, London, United Kingdom, SW1W 0SR, Tel +44020-7340-6347. The Credit Rating and Outlook is EU-endorsed.
Lead analyst: Alvaro Dominguez Alcalde, Analyst
Person responsible for approval of the Credit Rating: Dierk Brandenburg, Managing Director.
The Credit Rating/Outlook was first released by Scope Ratings on 12 June 2020.

Potential conflicts
See www.scoperatings.com under Governance & Policies/UK Regulation/Disclosures 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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