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 MFO Rico Express LLC including its current ratings on 12 September 2023.

The following ratings were reviewed:

• B+/Stable issuer rating
   
• S-4/Stable short-term debt 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 rating on Rico Express reflects the following credit rating considerations:

• Scope’s view of Rico Express business model is unchanged. Scope expects that Rico Express will maintain its business focus and preserve its leading market share. Rico Express is the largest microfinance organisation in Georgia by total assets; its loans represent around 28% of the MFO sector’s net loans as of June 2023. Rico Express operates a profitable business model focused on pawn loans secured by gold, precious metals and jewellery, as well as currency trading and international money transfers. Its lending activities are purely domestic. The bulk of its assets and liabilities mature within a year.The company does not intend to apply for a microbank license.
   
• Scope’s assesses the operating environment for Georgian MFOs as constraining (unchanged). Scope expects Georgia to maintain one of the most resilient real GDP growth rates over 2023-2024 (above 6% on average) of the Central and Eastern European countries, which is positive for the domestic financial sector, including for microfinance organisations. Geopolitical risk remains high and weighs on our assessment. However, Rico Express benefited from the recent spike in foreign exchange trading that resulted from the large migration outflow and remittances abroad.
   
• Scope notes the material improvement in the governance area in 2023 after establishing an audit and risk committee, as well as the appointment of an independent member of the Supervisory Board. However, Scope sees further room for improvement with respect to key person risk, management oversight and the separation of functions, and the definition of an articulated risk appetite framework (ESG factor). The company has started addressing these issues.
   
• The maintenance of conservative capital and liquidity metrics is a rating strength. Georgian microfinance organisations are regulated by the National Bank of Georgia. Rico Express is subject to regulatory requirements including a minimum capital ratio (equivalent to a leverage ratio) of 18% and a liquidity ratio (ratio of average current assets to average current liabilities) of 18%. Rico Express operates with a large buffer to the capital requirement (54% at end-June 2023), broadly in line with levels in previous quarters.
   
• Rico Express’ profitability metrics are solid and better than the sector average, which is an adequate first line of defence given its risk profile. Over 70% of revenues stem from interest income. The company’s loan book has more than doubled since 2017, benefiting from dynamic credit demand. The high net interest margin (above 10%) also reflects the optimisation of funding sources. Interbank funding is the main source in local currency while promissory notes subscribed to by individuals are used to access foreign currency funding.
   
• The Stage 3 loan ratio is low (1.3% at June 2023) but reflects the company’s active management of problem loans. The company has a good record of recovery on repossessed collateral. The clearly stated policy to dispose of collateral in an orderly fashion, i.e. with the aim of maximising the value of collateral only when market conditions become attractive, also exposes the company to market price volatility in case of a prolonged market correction.
   
• The granularity of the loan book, the high interest rates and the asset-backed nature of the loans are important risk mitigants. The company is highly exposed to gold price volatility because its underwriting criteria allow pawn loans to be granted at around 100% of collateral value, mainly against gold and there is no hedge in place against this risk. It is a key competitive advantage but also a key source of risk.
   
• Operational risk is also material because the company has to manage physically the collateral provided and is therefore exposed to the risk of fraud, theft or robbery. The company’s ability to continuously benefit from insurance covering these risks is an important mitigating factor.
   
• The company is exposed to foreign currency risk, which reflects the local economy's dollarisation and the company’s lending activities in dollars (4% of the loan book, though materially reduced in recent years). Foreign currency risk is fully-hedged via currency swaps.

Short-term rating

Based on our long-term/short-term credit rating correspondence, we take no action on the S-4 short-term rating.

Outlook and rating-change drivers

The Stable Outlook reflects Scope’s view that Rico Express’ credit profile will remain resilient during the next 12-18 months, despite the more challenging operating conditions stemming from high inflation and geopolitical tensions.

What could move the rating up:

• A reduction of the company’s risk profile, along with an improved governance framework.

What could move the rating down:

• Pressure on profitability due to a lower ability to generate sustained revenue, higher funding costs and/or higher impairment charges.
   
• Asset quality issues stemming from rising problem loans or less effective risk mitigants.
   
• A change in strategy, including capital and liquidity management, which materially increases the company’s risk profile.

Overview of the rating construct

• Operating environment: constraining
   
• Business model: focused
   
• Initial mapping refinement: high
   
• Initial mapping: b/b+
   
• Long-term sustainability: constrained
   
• 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 ratings and rating Outlooks (Financial Institutions Rating Methodology, 7 February 2023) is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
This monitoring note is issued by Scope Ratings UK Limited, 52 Grosvenor Gardens, London, SW1W 0AU, +44 207 8245180
Lead analyst: Alvaro Dominguez Alcalde, Analyst

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