Scope Ratings UK Limited (Scope) monitors and reviews its credit ratings on an ongoing basis and at least annually, or every six months in the case of sovereigns, sub-sovereigns and supranational organisations.

Scope performs monitoring reviews to determine whether material changes and/or changes in macroeconomic or financial market conditions could have an impact on the credit ratings. Scope considers all available and relevant information when undertaking the monitoring review.

Monitoring reviews are conducted by performing a peer comparison, benchmarking against the rating-change drivers, and/or reviewing the credit ratings’ performance over time, as deemed appropriate by the Lead Analyst or Analytical Team Head, in addition to an assessment of all aspects of the relevant methodology/ies, including key rating assumptions and model(s). Scope publicly announces the completion of each monitoring review on its website.

Scope completed the monitoring review for JSC MFO Micro Business Capital on 24 May 2022.

The following rating was reviewed:

•  B+/Stable issuer rating

This monitoring note does not constitute a credit rating action, nor does it indicate the likelihood that Scope will conduct a credit rating action in the short term. Information about the latest credit rating action connected with this monitoring note along with the associated rating history can be found on www.scoperatings.com.

Key rating factors

The B+ issuer credit rating on JSC Micro Business Capital (MBC) reflects the following rating considerations:

• MBC ranks among the largest Georgian microfinance organisations, with a business model mainly focused on collateralised micro and agro loans. Its market share has been resilient in recent years. MBC’s business model could benefit from the possible introduction of microbank licenses targeted at the largest Georgian microfinance organisations.
   
• An increasing access to international financial institutions offering funding in foreign currency is enhancing MBC’s funding profile by reducing its reliance on a few commercial banks. Foreign currency mismatch is material, with 48% of long-term funding in US dollars and a small portion of foreign currency loans. Hedges are in place but their cost weighs on earnings generation. They represented 20% of MBC’s net revenue before foreign exchange costs in 2021.
   
• Solvency and liquidity metrics are still reassuring. As of March 2022, the company held comfortable but shrinking buffers to both minimum capital and liquidity requirements, with a capital adequacy ratio of 24.5% (end-March 2021: 28.9%), which is 6pp above the requirement, and a liquidity ratio of 37.1% (end-March 2021: 54.6%), 19pp above the requirement.
   
• Profitability indicators improved in 2021, driven by larger loan volume growth, as the economy bounced back from the Covid-19 crisis. The company continues to have sound asset quality metrics compared to its peers. At end-2021, loans that were past due by over 30 days amounted to 1.8% of gross loans (69% of which were covered). Restructured loans amounted to 2.4% of the gross loan portfolio at the same date.
   
• MBC continues to actively engage in environmental, social and governance areas and in its preparedness for a digital transition (ESG factor), especially in the social and governance areas. This is still work in progress. Scope acknowledges the role of microfinance organisations in empowering local communities, improving financial inclusion, developing the domestic economy and increasing their relevance for the local economy. Further, the clear alignment of interests between MBC’s shareholders and managers indicates a commitment to long-term company value.

Outlook – rating-change drivers

The Outlook is Stable and reflects Scope’s view that MBC’s performance will remain resilient in 2022. Scope expects earnings to be sufficient to absorb potential credit losses.

What could move the credit 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 credit rating down:

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

Overview of the rating construct

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

Standalone assessment: b+

External support: not applicable

Issuer rating: B+

The methodology applicable for the reviewed rating and rating Outlook (Financial Institutions Rating Methodology, 28 January 2022) is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
This monitoring note is issued by Scope Ratings UK Limited at 52 Grosvenor Gardens, London, SW1W 0AU, +44 207 8245180
Lead analyst: Alvaro Dominguez Alcalde, Analyst

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