Rating action

Scope Ratings UK Limited (Scope) has today affirmed the issuer rating of JSC MFO Micro Business Capital (MBC) at B+ while changing the Outlook to Negative from Stable.

Rating rationale

The revision of the Outlook to Negative reflects the challenges MBC is facing given the more difficult operating environment, higher refinancing costs and their impact on profitability, the tighter management of buffers above the minimum capital requirement, and the tighter liquidity.

The B+ issuer credit rating on 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 is considering applying for a microbank licence. In Scope’s view, such a licence would enhance the resilience of MBC’s business model, further diversify its funding, reduce financing costs, and grant access to a larger potential market. However, this can only happen later and not before summer 2023.
   
• MBC’s funding profile has benefited from its access to international financial institutions that offer funding in foreign currency, reducing the reliance on a few commercial banks. Foreign currency mismatch is material, however, with 50% of funding in US dollars and a small portion of foreign currency loans as of September 2022. Hedges are in place but their cost is weighing on earnings: in 2021 they represented 20% of net revenue before foreign exchange costs.
   
• Profitability indicators worsened during the first half of 2022, driven by a trading loss on an open balance sheet position in US dollars and an increase in personnel expenses. The US dollar position is closed as of September 2022, alleviating some pressure on profitability.
   
• The profitability pressure also caused a material decline in solvency metrics during the last 18 months. The capital adequacy ratio reached 21.6% at end-September 2022 (end-March 2022: 24.5%), though still 360 bp above the central bank requirement. At the same time, MBC tightened its liquidity management: the liquidity ratio, at around 29% as of September 2022, is well above the central bank requirement, by 11 pp.
   
• Asset quality metrics continue to be sound compared to those of main peers. At end-September 2022, loans past due by more than 30 days were 2% of gross loans (and about 63% are covered) while restructured loans were 1.7% of gross loans.
   
• MBC remains active in environmental, social and governance areas and in its preparedness for a digital transition (ESG factor). It is especially strong in social and governance aspects. Scope acknowledges the role of microfinance organisations in empowering local communities, improving financial inclusion, developing the domestic economy, and increasing their relevance for its clientele.

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

Outlook and rating-change drivers

The Negative Outlook reflects Scope’s view on the challenges MBC is facing given the more difficult operating environment, higher refinancing costs and their impact on profitability, the tighter management of buffers above the minimum capital requirement, and the tighter liquidity position.

Scope could revise the Outlook to Stable if MBC’s profitability, capital and liquidity metrics stabilised close to end-2020 levels, thereby sustainably improving buffers above the minimum solvency metrics.

Scope would lower the rating if, in the context of the challenging operating conditions, MBC were to continue operating with pressured profitability and tight capital and liquidity positions.

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+

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, (Financial Institutions Rating Methodology, 28 January 2022), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
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-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/uk-regulation. 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-governance/definitions-and-scales. 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://scoperatings.com/governance-and-policies/rating-governance/methodologies.
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 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 52 Grosvenor Gardens, London, United Kingdom, SW1W 0AU, Tel +44 20 7824 5180. The Credit Rating and Outlook are EU-endorsed.
Lead analyst: Alvaro Dominguez Alcalde, Analyst
Person responsible for approval of the Credit Rating: Nicolas Hardy, Executive Director
The Credit Rating/Outlook was first released by Scope Ratings on 3 February 2020. The Credit Rating/Outlook were last updated on 6 July 2021.

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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