GCR Places LAPO MfB on Negative Rating Watch, Downgrades Lender Over Infractions
- Rating considers Material Governance Issues
- Breaches of Regulatory Guidelines, Weak Transparency
- Pressures Mount on Asset Quality, Rising Credit Losses
- CBN Withheld Audited Statement for 2020
- Risks Penalties from Regulator
GCR Ratings has downgraded LAPO Microfinance Bank Limited’s national scale long-term issuer rating to BBB-(NG) from BBB (NG), with the outlook placed on negative rating watch, according to a recent rating note.
The emerging-market rating agency also said it has affirmed the Mfb’s short-term issuer rating of A3 (NG). It said the downgrade reflects sustained pressure on LAPO Microfinance Bank Limited’s asset quality metrics – credit losses and non-performing loans.
The pressures mount on asset quality following the 2020 pandemic-induced challenges in the operating environment, as well as the bank’s breaches of regulatory guidelines.
The bank’s risk position is a rating negative, according to the rating note. GCR explains that the bank was significantly impacted by the Covid Pandemic which disrupted operations and severely affected its customer base in 2020. Resultantly, there has been a material weakening in credit losses, which spiked to 5.6% in the financial year 2020 from 0.4% in 2019.
GCR noted that IFRS9 Stage 3 loans also increased to15.8% in 2020 from 9.6% as of 2019; and 1-day portfolio-at-risk (PAR) deteriorated to 33.2% as of 9-month 2021 from 20.5% in 2020, substantially above CBN’s 5% PAR tolerance limit for Microfinance Banks.
Market and foreign exchange risks are minimal due to the limited scope of operations for Microfinance institutions, according to the rating note. The emerging-market rating agency said the micro-nature of the credit facilities bodes well for obligor concentrations in the loan book, with the top 20 obligors contributing less than 1% to gross loans and advances in 2020.
GCR said although most loans are unsecured retail exposures, adding that related-party lending is contained below the 10% threshold.
Moving forward, the bank’s risk position remains vulnerable to similar disruptions experienced in 2020, as well as the high inflationary environment which has a disproportionate impact on the bank’s target market, the rating note reads. Emphatically, GCR said management and governance are negative to the ratings, to reflect breaches of regulatory guidelines and weak transparency.
“While remedial actions have been taken by the bank based on our interactions with management, the Central Bank of Nigeria (CBN) has yet to approve the 2020 audited financial statements”. GCR said it takes into cognisance these material governance issues in the assessment.
It said LAPO Mfb’s competitive position reflects its position as a dominant niche player within the microfinance banking space in Nigeria.
With a balance sheet size of N82.2 billion as at 2020 unapproved audited financial statements, LAPO contributes an estimated 24.0%, 12.8%, and 15.6% to the microfinance industry’s gross loans and advances, customer deposits, and total assets.
However, contribution to the broader banking sector is low, with a market share of less than 1.0% measured by gross loans and advances, customer deposits, and total assets, GCR explained.
It said the bank has a strong customer base spread across the country, enabling it to reach underserved segments of the market, albeit earnings have been significantly pressured over the review period.
Furthermore, the rating note added that LAPO demonstrates sufficient levels of capital.
Although; its capital was pressured significantly due to the steep loss incurred in 2020, LAPO Mfb’s capital adequacy ratio (CAR) remained strong at 24.4% from 31.4% in 2019, well above the 10% required minimum.
Over the rating horizon, GCR said its Core Capital ratio is forecast to be maintained within the high range (>25%), driven by a modest recovery in earnings, albeit we factor in steep growth in risk-weighted assets (RWA).
LAPO Mfb’s funding and liquidity is neutral to the ratings, according to the rating note. GCR said the bank’s funding structure is considered stable, with customer deposits comprising 57.8% of the funding base as of 2020 compared with 64.6% in 2019.
“The bank’s balance sheet is moderately liquid, GCR liquid assets coverage of customer deposits and wholesale funding registered at 38.1% and 0.5x respectively as of 2020”.
The bank has also met the prudential liquidity benchmark, with treasury bills to deposits ratio maintained just above the 5% stipulated minimum through 2021, and liquidity ratio registering at 37.1% as of 9-month of the financial year 2021, against the required minimum of 20%, GCR noted.
Outlook statement
GCR said in the rating note that LAPO Rating Watch Negative highlights the near-term risks for ongoing regulatory and weak transparency issues that could result in negative regulatory findings/actions.
It noted that challenging operating conditions that result in weaker than expected asset quality may also result in negative rating pressure over the short term. READ: LAPO Microfinance Bank Earmarks N10Bn to Support Agric. Projects
However, should regulatory issues be resolved without material adverse findings, this could moderate the negative management and governance assessment and lead to a change in the outlook, GCR rating note stated. #GCR Places LAPO MfB on Negative Rating Watch, Downgrades Lender Over Infractions
