Rating action

Scope Ratings UK Limited (Scope) has today affirmed JSC Micro Business Capital (MBC)’s issuer rating of B and changed the Outlook to Positive from Stable.

The affirmation of the B issuer rating on MBC and the revision of the Outlook to Positive from Stable factors MBC’s overhaul of its risk management capabilities as it strives to transition from a microfinance organisation into the recently created microbank legal status, which remains pending regulatory approval. In Scope’s view, this microbank status entails compliance with a more sophisticated and demanding capital and risk management framework and regulatory oversight, closer aligned with banking institutions. Complying effectively with a more demanding regulatory framework will likely strengthen the company’s resilience. This is a positive credit development which could be further factored in the form of a higher operating environment assessment for MBC, hence a higher issuer rating, everything else being equal, in particular the company’s sustained financial performance.

The full list of rating actions and rated entities is at the end of this rating action release.

Key rating drivers

Business model assessment: Focused (high). MBC is one of the largest microfinance organisations (MFO) in Georgia, with a business model focused on collateralised lending to micro-organisations, SMEs and the agricultural sector. MBC submitted an application for a microbank licence to the National Bank of Georgia in November 2023. The application is under review and a decision is expected by November 2024 at the latest. Scope views this strategic decision to apply for a microbank licence positively, as this status would allow for greater diversification on both sides of the balance sheet and access to a larger potential market. However, reaping the full benefits of this change will take some time, such as attracting customer deposits to further improve its funding diversification and reduce funding costs.

Operating environment assessment: Constraining (low). Georgia is a small emerging economy that, despite gradual improvements and reforms in recent years, still lags behind regional peers in some macroeconomic indicators (e.g. unemployment rate, GDP per capita, economic diversification). Recent political tensions have not yet changed the economic outlook so far but they remain an area of attention. The National Bank of Georgia supervises the microfinance organisation (MFO) sector under a set of regulations that are less stringent than those for licensed banks and microbanks. The regulatory framework for microbanks has recently been enacted and is better aligned with the banking regulatory framework, which in Scope’s view will strengthen the operational set-up for entities that are currently subject to less stringent regulatory oversight.

Scope arrives at an initial mapping of ‘b’ based on a combined assessment of the issuer’s operating environment and business model.

Long-term sustainability assessment (ESG factor): Developing. MBC remains committed and active in environmental, social and governance areas and investing in digitalisation (ESG factor). Recent examples include the company’s integration into an e-commerce platform for its foreign exchange operations and the development of a remote loan application platform. The role of microfinance organisations in Georgia in facilitating financial inclusion also reinforces the company's business relevance.

The long-term sustainability assessment leads to an adjusted rating anchor of ‘b’.

Earnings capacity and risk exposures assessment: Neutral. MBC's profitability is improving due to higher loan volume growth, lower hedging costs and lower provisions. Following the consolidation of its branch network and strategic changes to its commercial strategy to improve cross-selling, Scope expects MBC's revenue base to continue to grow in 2024, driven by its expected business expansion. Meanwhile, MBC continues to invest and prepare its business model to meet the requirements of a microbank regulatory status and develop its renewed value proposition.

Financial viability management assessment: Adequate. MBC maintains an adequate capital position with a buffer of approximately 380 bps above the 18% minimum regulatory capital requirement for MFOs. Due to management’s objective to obtain funding at the lowest possible costs, MBC has experienced some periods of tight liquidity, but has managed to maintain levels above the regulatory requirement. The national regulator requires MFOs to hold at least 18% of cash against debt maturing within six months.

MBC has managed to diversify its funding mix, but currency mismatch, while declining from a peak of 53% in 2020 to 38% in May 2024, remains an area of attention due to hedging needs, which adds to overall funding costs. MBC relies on a mix of local commercial banks, bond issuance and international financial institutions to fund its lending activities. A first bond issuance of GEL 15 million took place in December 2022 and, together with access to international financial institutions, has provided further funding diversification. It has proven to be an efficient source of funding due to its competitive cost compared to local banks’ funding. The bond matures towards the end of 2024 and MBC is considering various options, also considering potential business developments. Further funding diversification through deposits would only be possible with the legal status of a microbank.

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

Outlook and rating sensitivities

The Positive Outlook reflects Scope’s view that by complying effectively with the more demanding microbank regulatory framework MBC would strengthen its credit risk profile.

The upside scenarios for the rating and Outlook are (individually or collectively):

1. Confirmation that compliance with the microbank licence’s requirements enhances MBC’s creditworthiness, which could be reflected in a higher operating environment assessment.
    
2. Evidence that the company is able to generate sustained and consistent earnings, e.g. by leveraging on the benefits of a microbank license.
    
3. A material improvement in capital metrics, with a larger and stable excess buffer above the regulatory minimum, and sound liquidity management.

The downside scenarios for the rating and Outlook are (individually or collectively):

1. Failure to obtain a microbank license.
    
2. Pressure on profitability due to a lower ability to generate sustained revenue, higher funding costs and/or higher impairment charges.
    
3. Material deterioration in the company’s liquidity position as well as in its solvency metrics.

Environmental, social and governance (ESG) factors

Please refer to the ‘long-term sustainability assessment’ under the ‘key rating drivers’ section above for the ESG analysis.

All rating actions and rated entities

JSC MFO Micro Business Capital

Issuer rating: B affirmed, Outlook change to Positive from Stable.

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, 6 February 2024), 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 and Outlook were amended before being issued.

Regulatory disclosures
The 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 was last updated on 17 October 2023.

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.

Conditions of use / exclusion of liability
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