Rating action

Scope Ratings UK Ltd (Scope) has today affirmed its issuer rating of B+ on JSC MFO Micro Business Capital (MBC) with a Stable Outlook. Scope has also today withdrawn its senior unsecured debt rating of B+ with a Stable Outlook for business reasons.

Rating rationale

The Stable Outlook reflects Scope’s view that MBC’s credit profile has remained resilient despite the economic impact caused by the Covid-19 pandemic.

The ratings reflect MBC’s position as one of the largest Georgian microfinance organisations. MBC has increased its market share in recent years, driven by a well-diversified business model focused on growing micro and agro loans. MBC’s business model could benefit from the possible introduction of microbank licenses targeted at the largest Georgian microfinance organisations. After a delay due to Covid-19, the draft bill is expected to be submitted to parliament by autumn.

The ratings benefit from a sound funding profile. MBC benefits from increasing support from international financial institutions, which contributes to safe and stable long-term foreign currency funding and reduces the reliance on a few commercial banks.

The company continues to maintain reassuring solvency and liquidity metrics. As of Q1 2021, the company held comfortable buffers to both minimum capital and minimum liquidity requirements, with a capital adequacy ratio of 28.9% (1,090 bps buffer over requirement) and a liquidity ratio of 54.6% (3,660 bps buffer over requirement). Under the National Bank of Georgia’s regulation, microfinance organisations must hold at least 18% of cash against debt maturing within six months.

Due to the larisation programme implemented by the Georgian government in 2017, the share of US dollar loans in MBC’s portfolio fell from 35% to just 7% in 2020. The reduction resulted in a balance sheet mismatch, with 50% of longer-term funding in US dollars, as well as foreign exchange risk. Foreign exchange volatility resulted in increasing hedging costs which represented 26% of MBC’s net revenues before foreign exchange income in 2020. Scope expects less foreign exchange volatility in 2021, which will allow the company to manage better its FX position.

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 MBC as ‘developing’. The role of microfinance organisations to empower local communities, improve financial inclusion and develop the domestic economy has a positive weight on MBC’s rating. Further, the clear alignment of interests between shareholders and managers indicates a commitment to long-term company value. MBC is taking steps to improve in environmental and social factors as well as in information technology. However, there is still room for improvement, especially in the environmental area due to inadequate disclosures on specific targets, processes and strategy.

Profitability metrics are solid. In recent years, MBC has developed a good track record, displaying better results than the domestic microfinance sector in most profitability metrics. MBC has suffered less from the Covid-19 crisis than peers, with past due loans of greater than 30 days amounting to only 3% as of December 2020 and stronger coverage. After moratoriums ended in November 2020, effective clients were paying on revised schedules. As of 2020, restructured loans amounted to 3% of the gross loan portfolio.

Rating-change drivers

The Stable Outlook reflects Scope’s view that MBC’s performance will remain resilient in 2021, based on the expectation of an improving operating environment in 2021. Scope expects MBC’s earnings to be sufficient to absorb potential credit losses.

What could move the rating up:

• Transformation into a microbank, leading to improved product diversification, additional layers of safer and more predictable funding inflows (e.g. deposits), and stricter regulation.

What could move the rating down:

• Larger foreign exchange losses that negatively affect earnings.
   
• Material deterioration in the portfolio’s credit quality.
   
• Higher competition in domestic agro loan market that reduces profitability of one of MBC’s key products.

Overview of the rating components

Operating environment: Constraining

Business model Focused

Initial mapping refinement High

Initial mapping b/b+

Long-term sustainability Developing

Adjusted anchor b

Earnings capacity and risk exposures Neutral

Financial viability management Comfortable

Additional rating factors Neutral factor

Standalone assessment b+

External support Not applicable

Issuer rating B+

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

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, the Rated Entities’ Related 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 are 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 are 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 3 February 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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