GCR Revises Outlook on MyCredit to Stable, Affirms Rating
MyCredit Investments Limited’s national scale long and short term issuer ratings of BBB (NG) and A3 (NG), respectively, have been confirmed by GCR Ratings.
The outlook on the ratings has been revised from negative to stable, the rating agency said. The affirmation, according to GCR, reflects sustained entrenchment of its market position as a digital microlender in Nigeria, as well as its good cash flows and liquidity.
The company, which trades as ‘Fairmoney’, is a wholly owned subsidiary of France-domiciled Predictus SAS – the parent company. The parent is a non-operating holding company with subsidiaries in Nigeria, Zambia and Uganda, according to GCR Ratings.
The ratings analysts said while there are plans for further expansions, MIL remains the dominant subsidiary, accounting for nearly all the operating income and assets of the group.
GCR expressed that the company rating broadly reflect the strengths and weaknesses of the unconsolidated group, viewed primarily from the lens of the Nigerian business.
Additionally, it stated that the company’s ratings are still bolstered by its robust cash generation and, as a result of strong shareholder support, its increasingly conservative debt profile.
Customer deposits to total non-equity funding increased from 44.8% as of December 2022 to 80.0% as of December 2023 and then to 85.9% as of June 30, 2024, according to the rating note, which also showed that the company had experienced strong mobilization.
Although deposits are mostly from corporations and high net worth individuals, which indicates a higher concentration than MIL’s microfinance banking peers, GCR claims that this has further stabilized funding.
Funds from operations (FFO) to net-debt ratio improved to over 100%, while net-debt to EBITDA eased to below 2.0x, according to the rating note, which also showed that MyCredit Limited’s shareholder debt had been fully converted to equity.
The interest cover is somewhat volatile in comparison, GCR said as rating analysts expect it to remain low at around 2.0x over the outlook period due to the high-interest rate environment.
Fairmoney reported net profits of N0.8 billion, or USD 0.5 million, in the fiscal year 2023 and N6.6 billion, or USD 3.9 million, in the nine months ending September 30, 2024. The company’s profit was a reversal from N1.9 billion or USD1.1 billion net loss reported in 2022.
The stronger earnings in the current fiscal year are being driven by sustained growth in net interest income, a pickup in payment processing fees from N1.4 billion or USD0.8 million in 2023 to N4.0 billion or USD 2.4 million in 3Q 2024; and scale efficiencies supporting the cost-to-income ratio below 40%.
Rating analysts at GCR noted that net interest margin sustained well above 70% at the end of the third quarter of the financial year 2024.
The high-risk profile inherent in its target market and unsecured product offering has traditionally curtailed the quality of the company’s loan book, the rating note added.
“Impairments and write-offs typically offset over 50% of its operating revenue, while MIL’s non-performing loan and credit loss ratios are materially higher than those of its peers.
“While we have noted a general improvement in asset quality on the back of better underwriting and improved collection rates, asset risk remains a key rating constraint,” GCR stated.
Positively, the company’s earnings was mainly derive from stable sources such as net interest income and fees from payment solutions services, with limited exposure to market sensitive income.
Looking ahead, increasing income from the payment solutions business is expected to mitigate the impact of credit losses on operating income, although it is not likely to become a major contributor to cash flows in the next 12 to 18 months, GCR said.
Through the use of proprietary technology, Fairmoney provides access to loans for Nigerians most of whom are likely excluded from the traditional banking system.
So far, the company has disbursed over fifteen million loan facilities valued at over N500 billion, making it one of Nigeria’s top microlenders, according to the rating note.
The digital-led process helps to onboard clients relatively quickly, thus providing a competitive advantage over most peers in the sub-segment.
Other competitive strengths relative to other microlenders include MIL’s more diverse earnings base and funding sources.
The unsecured lending model is however inherently risky, while microlending financial institutions are a small niche in the broader financial institutions universe.
As a result, despite being a niche market leader, the company’s competitive position is negative to the ratings.
The stable outlook reflects expectations that earnings growth will be sustained at current level, improvements in cash flow and leverage metrics, including funds from operations (FFO) to debt and earnings-based leverage will be sustained, GCR stated.
Also, the rating agency expects asset quality will continue to improve over the outlook period, although metrics are expected to continue to track at much weaker levels relative to peers. #GCR Revises Outlook on MyCredit to Stable, Affirms Rating Money Market Rates Mixed as Banking System Deficit Reduces
