GCR Affirms DLM Capital Group Ratings with Stable Outlook
GCR Ratings (GCR) has affirmed DLM Capital Group Limited’s national scale long-term and short-term issuer ratings of BBB-(NG) and A3 (NG) respectively, accorded it with a stable outlook.
The stable outlook is hinged on the ratings agency’s expectation that DLM’s financial leverage ratio could strengthen on account of the planned movement of the asset management subsidiary’s FUM off the Group’s balance sheet in the near term.
It added that DLM’s funding structure could improve on account of an expanded business, supporting liquidity over the outlook period.
“While we do not envisage a significant change in the Group’s risk profile, the fragile macroeconomic state may result in higher NPLS and credit losses.”, GCR Ratings said in its note. The firm explained that the ratings of DLM Capital Group Limited (DLM) are hinged on the creditworthiness of the parent company and its seven subsidiaries.
The rating note lists the subsidiaries to include Links Microfinance Bank Limited, Citihomes Finance Company Limited, DLM Trust Company Limited, DLM Asset Management Limited, DLM Securities Limited, DLM Advisory Limited and DLM FX Trading Limited.
The ratings reflect a relatively stable and concentrated funding base, good capitalisation metrics, adequate liquidity, a modest competitive position, and an intermediate risk assessment, GCR said.
The rating note said the group’s operating revenues are stable and have grown over the years registering a 3-year cumulative average growth rate (CAGR) of 39% in 2022. It added that the Group’s return on assets (ROA) and return on equity (ROE) which printed at 5.2% and 26.7% respectively were good.
GCR noted that Link MFB and DLM Asset Management Limited accounted for almost half of the Group’s gross earnings in 2022. By structure, Links MFB accounts for 26% of the group while DLM Asset Management Limited accounts for 23%, according to the rating note.
“Over the next 12-18 months, there could be a moderate improvement in DLM’s competitive position if the planned expansion and further diversification of the lending business through technology and recapitalisation materialises”, the rating note stated.
However, GCR Ratings said transition risks would need to be well managed to ensure earnings remain stable and market share is not eroded.
“Our assessment of DLM’s financial leverage continues to be ratings positive despite fairly rapid moderation over the last 12-18 months. DLM’s financial leverage ratio was 17.1% as of 30 June 2023 reducing from 25.5% in December 2022 due to a 54.3% growth in total assets and a 3% increase in capital”, it added. The rating note explained that the group capital base is somewhat exposed to revaluation gains on an investment property.
However, on a forward-looking basis, GCR considered a likely improvement in the Group’s leverage ratio on the back of a planned movement of the asset management subsidiary’s funds under management (FUM) off the balance sheet.
“Should this materialise and be reflected in the Group’s audited financial statements for 2023, DLM’s leverage ratio could rise above 20%”, GCR said.
The firm said the successful recapitalisation of Links MFB or the external verification of the risk-based models could positively impact our assessment of capital and leverage going forward.
“However, if the leverage ratio fails to improve back to 20%, we could lower the ratings”. According to the rating note released, DLM’s risk profile is considered intermediate and a slight negative to the ratings.
The group’s loan exposures of N8.2 billion or USD18.3 million as of 31 December 2022 contained retail credits and structured facilities to selected medium and large corporates, all with maturities within a year, GCR Ratings said.
“It is our understanding that the structured facilities are held as investment securities on a balance sheet, accounted for on an amortised basis. Therefore, changes in the creditworthiness of the corporate exposures are not reflected as fair value through profit or loss but on a provisioning basis, like the retail loan book”.
On this basis, GCR stated that the quality of the loan exposures measured by a non-performing loan (NPL) ratio of 2.3% and a cost of risk at 1.7% compared somewhat favourably with peers.
Loan loss coverage on non-performing loans was sufficient at 86.4% and collateral cover for the loan book was adequate, the rating note stated. In the short term, GCR said it expects DLM’s risk profile to remain stable despite anticipated growth in the loan portfolio.
However, it added that the structured facilities portfolio remains vulnerable to weak macroeconomic fundamentals given the breadth of economic sector exposures. It said obligor concentration exists in the loan portfolio as the top 20 largest exposures accounted for 62.5% of gross loans and advances as of 31 December 2022. Nonetheless, FX risk is lower than the peer group.
DLM’s funding structure comprises retail customer deposits from the microfinance subsidiary, purchased deposits generated from other subsidiaries and commercial papers issued in the debt capital market to a lesser extent, according to the rating note.
GCR said although the contractual maturities of the purchased funds are between 90-365 days, a behavioural analysis provided by management suggests they have been sticky to date, which we view positively.
However, the firm said it recognised some level of concentration in the depositors’ base as the top 20 depositors accounted for 41.9% of total funding (including commercial papers issued) as of 31 December 2022, similar to the prior year.
The rating firm also said liquidity is adequate for the company’s operations and is supported by a committed line of credit from a tier 1 bank.
As of 31 December 2022, liquid assets covered total wholesale funding (commercial papers) 1.8x from 2.3x in 2021 and liquid assets to customer deposits was 35.3% in 2022 versus 30.7% in 2021.
“Going forward, we expect DLM’s funding base to remain moderately diversified and stable, with further growth projected with the planned expansion of the microfinance subsidiary. We also project similar liquidity coverage ratios over the next 12-18 months.
“Our assessment of management and governance is neutral to the rating. The influence of the major shareholder and Group Chief Executive Officer who also chairs the boards of most of the subsidiaries is highlighted”, GCR Ratings said. However, GCR analysts acknowledge the presence of independent directors within the Group. Naira Devaluation Deepens Economic Crisis in Nigeria
