GCR Ratings Revised Outlook on Zedcrest Capital to Negative

GCR Ratings (GCR) has affirmed the national scale long-term and short-term issuer ratings of BBB-(NG) and A3 (NG) respectively, accorded to Zedcrest Capital Limited, with the outlook revised to negative from stable.

In its latest rating note on the issue, GCR explained that the negative outlook on Zedcrest Capital Limited reflects an elevated credit and market risk profile. This also include a breach of the company’s regulatory capital adequacy ratio at its core operating subsidiary level, the emerging market rating firm added.

However, it noted that the ratings affirmation balances the group’s strong leverage ratio, stable funding profile and adequate liquidity against a relatively modest contribution to the wider financial services sector.

GCR said in its update that it considers Zedcrest’s relatively small size within the wider financial services sector in Nigeria to be a constraint to its business profile assessment.  The rating firm stated that it positively viewed the diversified product offering through its three subsidiaries.

Zedvance Finance Limited, the core operating subsidiary of the group, focuses on consumer lending and is regulated by the Central Bank of Nigeria (CBN). The rating firm said additional support is provided by Zedcrest Investment Managers Limited (ZIMVEST), the asset management subsidiary; and Zedcap Partners Limited (Zedcap), the brokerage subsidiary which drives the securities dealing business of the entire group.

“Zedcrest has reported stronger earnings relatively to some of its direct peers over the years, largely supported by interest income from Zedvance’s lending business. However, we expect its earnings profile to remain volatile due to the strong contribution of market sensitive income from Zedcap to total operating revenues”, GCR Ratings said.


It added that risk remains a significant negative ratings factor on account of weak asset quality metrics. Zedcrest reported significant credit losses in 2022 and 2023 totaling N8.4 billion and N4.5 billion, respectively, according to the rating note.

This reflected the high default rates associated with unsecured consumer loans, and high-risk trading securities, according to GCR ratings.

“Focusing on its consumer lending business, the group was challenged with problem credits from two state governments that underwent a revalidation of the payroll systems and platforms, which led to delays in collections and repayment of the existing loans for over six months”, GCR stated.

As a result of the development, the company’s credit loss ratio widened to 28.1% in 2022 from 9.8% in 2021, but narrowed to 12.3% in 2023, albeit remaining on a weak level.

The ratings firm said similarly, the ratio of non-performing loans (NPL) to gross loans was elevated, registering at an average of 15% over the last three years. Economic Growth in Sub-Saharan Africa Projected at 3.8% in 2024-IMF

“Although collections have improved, we do not expect a material improvement in the NPL ratio in the near term given the inherent credit risk associated with consumer lending and a concentration on the public sector, which accounted for 89% of the loan book as of December 31, 2023”.

GCR said the group is pushing ahead with its diversification strategy, aimed at increasing private sector exposure in the near term, with an increased focus on SME lending.

It further added that Zedcrest is exposed to market risk from its investment securities portfolio, which represented 37.6% of total assets in 2023 as against 15.2% in 2022.

“The investment portfolio is dominated by promissory notes and sovereign Eurobonds, contributing to the huge credit loss recorded since 2022.

“Furthermore, we observed a sharp rise in unquoted equity investment comprising unrated, high-risk entities (largely fintechs), thus heightening counterparty risk.”. The rating note reads that management indicated that a Fund would be established by a related company to house these unquoted equity investments in the near term.

“Over the outlook period, we expect mark-to-market movements in the securities portfolio to continue to drive earnings and capital volatility, especially considering the general market sentiment”.

The firm noted that the assessment of capital and leverage remains a strong ratings factor. Although Zedcrest’s leverage ratio dipped below 45% in 2023, from a high of 70.5% in 2021 due to the sharp asset accretion, it remained within the highest level of GCR Ratings assessment (above 20%), supported by strong internal capital generation and earnings retention.

Nonetheless, Zedvance’s capital adequacy ratio (CAR) of 7.6% in December 2023 contravened the regulatory threshold of 12.5%, according to the rating note.

GCR said in its note that there are expectations of an expansion in the capital base in the near term to regularise the CAR, through additional equity raise and the conversion of existing deposit for shares, subject to CBN approval.

“Nevertheless, we expect the group’s leverage ratio to remain pressured by downside risks from earnings volatility, macroeconomic pressures, and Zedcrest’s high growth strategy.

“We assessed funding and liquidity to be positive. Prior to 2022, Zedcrest had a limited funding structure, with operations largely funded by equity capital as it is a non-deposit institution.

“The group has now introduced debt in its balance sheet, through borrowed corporate bonds to enhance funding flexibility. Furthermore, managed funds through ZIMVEST have increased, albeit tied directly to liquid tradeable securities.

“In addition to the planned capital raise, the group is considering another commercial papers (CP) issuance over the 18-month period,” GCR said in the rating note.

Overall, the long-term funding ratio of 96% and GCR’s computed stable fund ratio of 41% are within comfortable levels, reflective of the long-term nature of the funding base, the firm added.

GCR said as a microlender with short-tenured loans, the company’s liquidity is driven by receipting of loan repayments on a month-on-month basis. It said receipting schedule shows strong collections levels, averaging 12.85% receipting rate in 2023, against 14.7% in 2022, but has now improved to 14.1% at March 2024.

At this rate, Zedcrest will typically receive the gross amount of its loan book for the year in 8 months, according to the rating note.

Overall, the liquidity profile benefits from the long-term nature of the debt profile but could change as the short-term debt portion increases with the planned commercial paper, CP, issuance.

“The negative outlook reflects our expectations that Zedcrest’s inherent credit risk and high-risk investment appetite could heighten earnings volatility. This could result in weaker asset quality and capital assessments,” GCR Ratings said.

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