Rating action

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

In Scope’s view, the microbank status entails compliance with a more sophisticated and demanding capital and risk management framework and greater regulatory oversight, more closely aligned with the one for banking institutions in Georgia. Complying effectively with a more demanding regulatory framework will strengthen the company’s resilience. This positive credit development is factored in the form of a higher operating environment assessment for MBC, which drives the rating upgrade.

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-low (changed from Focused-High). With 17 branches spread across Georgia, MBC is the first licensed microbank in the country with a business model focused on collateralised lending to businesses and consumers. The National Bank of Georgia (NBG) granted MBC a microbank license on the 5th of December 2024. Over time, this will lead to a reduction in the weight of lending to consumers as one requirement for microbanks is for at least 70% of loans to be directed to businesses.

Scope views the NBG’s granting of the license positively, as this new status will 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-high (changed from Constraining-low). Georgia is a small emerging economy that still lags regional peers on several macroeconomic indicators (e.g. unemployment rate, GDP per capita, economic diversification), despite gradual improvements and reforms in recent years. Current social tensions, stemming from a political crisis and contested election, raise economic uncertainty and remain an area of attention.

Banking regulation in the country is aligned with Basel 3 standards. The regulatory framework for microbanks is closely aligned with the banking regulatory framework. Previously, the assessment stood at Constraining-low, reflecting the less stringent regulatory requirements for MFOs.

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 newly created microbanks in Georgia in empowering underserved local communities, supporting entrepreneurial and agricultural sectors as well as 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: Supportive (+ 1 notch, changed from Neutral). MBC’s profitability has been improving materially since H2 2023, reporting its highest profitability level in 9M 2024 since its foundation, as a result of higher loan volume, lower hedging costs and lower provisioning charges. We expect its revenue base to continue to grow in the medium-term thanks to i) good momentum of the Georgian economy, although the current political instability is likely to weigh on the outlook; ii) ability to originate larger loan tickets under the new microbank status. MBC’s asset quality metrics remain sound due to its diversified business mix as well as its practically fully collateralized and, hence, less risky business model.

Financial viability management assessment: Adequate. Scope expects MBC to maintain a sound capital position, meeting and exceeding minimum capital requirements under the microbank prudential regime. Due to management’s objective to obtain funding at the lowest possible costs, MBC has experienced some periods of tight liquidity in the past but has managed to maintain levels above the regulatory requirement. The National Bank of Georgia requires microbanks to hold at least a liquidity coverage ratio (LCR) of 100% for combined local and foreign currency, level that MBC significantly exceeds, and a net stable funding ratio (NSFR) of 100%.

MBC has managed to diversify its funding mix, but currency mismatch, while declining from a peak of 53% in 2020 to 37% in September 2024, remains an area of attention due to hedging needs, which adds to overall funding costs. MBC currently 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 during the first half of December 2024. Scope expects bonds to remain a key source of funding for MBC, even under its new regulatory status. Scope notes that MBC will start taking customer deposits from 2025 onwards which will diversify further its funding sources.

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

Outlook and rating sensitivities

The Stable Outlook reflects Scope’s view that the risks to the current rating are balanced.

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

1. Significant growth and strengthening of MBC’s market position while preserving sound levels of profitability and risk.
    
2. A material improvement in capital metrics, with larger and stable excess buffers above the minimum regulatory requirements, and sound liquidity management.

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

1. A significant deterioration in the operating environment for Georgian banks and microbanks, which could result from prolonged political uncertainty and tensions.
    
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 capital 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+/Stable, upgraded from B/Positive

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 not amended before being issued.

Regulatory disclosures
These 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: Marco Troiano, Managing Director
The Credit Rating/Outlook were first released by Scope Ratings on 3 February 2020. The Credit Rating/Outlook were last updated on 25 July 2024.

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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