FINBOND GROUP LIMITED - GCR Upgrades Finbond Group Limiteds Rating To BBB(ZA); Outlook Stable

GCR Upgrades Finbond Group Limited’s Rating To BBB(ZA); Outlook Stable

FINBOND GROUP LIMITED
(INCORPORATED IN THE REPUBLIC OF SOUTH AFRICA)
(REGISTRATION NUMBER: 2001/015761/06)
SHARE CODE: FGL ISIN: ZAE00013895

GCR UPGRADES FINBOND GROUP LIMITED’S RATING TO BBB(ZA); OUTLOOK STABLE

Shareholders are advised that Global Credit Ratings has today upgraded the
long term national scale rating of Finbond Group Limited to BBB(ZA) and
affirmed the short term national scale rating of A3(ZA); with the outlook
accorded as Stable. Furthermore, Global Credit Ratings has affirmed the long-
term international scale local currency rating assigned to Finbond Group
Limited of B+; with the outlook accorded as Negative.

SUMMARY RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit ratings to
Finbond Group Limited (“Finbond” or “the group”) based on the following key
criteria:

   -   The upgrade of Finbond Group Limited’s (“Finbond”, “the group”) long
       term rating stems from notably improved earnings diversification,
       following business acquisitions undertaken during FY17. Further rating
       support is derived from the group’s very strong capitalisation, low
       risk liquidity structure, as well as strong competitive position in a
       niche market of short term unsecured lending.
   -   Finbond reflects notably improved earnings diversification, following
       the successful execution of the initial phase of its five year
       strategic plan, targeting local and offshore businesses with product
       ranges and customer bases in sync with the group’s existing core
       competencies. In terms of the latter, the group acquired eight short
       term and instalment lending companies operating in the United States
       of America (“USA”) and Canada in FY17. Finbond is expected to derive
       diversification benefits from the comparatively favourable risk
       profiles of the acquired credit portfolios, while enhanced geographic
       exposure is also viewed to diversify the group’s earnings base.
       Enhanced diversification is expected through the continued unfolding
       of the group’s medium term strategic expansion, supported by
       availability of resources and operational/technological innovation.
       Furthermore, the group remained committed to strengthening its local
       branch network, acquiring loan books of an additional 35 branches
       during FY17.
   -   In FY17, pre-tax profit rose 194% to R279m on the strength of the
       growth-intensive USA businesses. The majority of profit was derived
       from Finbond’s growing microfinance transactional lines income. The
       cost/income ratio declined to 61.1% (FY16: 64.7%) in FY17, as
       efficiencies were obtained from economies of scale following the North
       American acquisitions. Overall, ROaE and ROaA strengthened to 18.2%
       and 4.4% respectively at FY17. Execution risk in maintaining the new
       portfolios’ profitability is viewed to be mitigated by the favourable
       historic performance of these books.
   -   The group cemented a strong capital position in FY17. Finbond’s
       capital/assets ratio increased to 37.3% (FY16: 27.8%), supported by
       injection of share capital and Tier 2 qualifying subordinated
       shareholder loans. Finbond Mutual Bank’s (“FMB”) capital adequacy ratio
       was 34.1% (FY16: 36.5%) at FY17, remaining above regulatory minima of
       25%.
   -   Finbond’s credit portfolio expanded by 204% in FY17, while asset
       quality also improved on the strength of enhanced credit granting and
       collection criteria, coupled with the incorporation of the new
       portfolios into the group’s loan book. The group registered an
       improvement in its collection rates to 94% (FY16: 86%). The North
       American portfolio had an average collection rate of 96%. The arrears
       ratio (past due loans/gross advances) remained somewhat stable at 15.8%
       (FY16: 15.6%) at FY17, with coverage ratio increasing to 58.4% (FY16:
       49.1%) at FY17.
   -   Finbond possesses a low risk liquidity structure due to positive
       asset/liability mismatch. The term structure of fixed deposits ranges
       6-72 months and indefinite term, while loans are cash-intensive with
       average term of 3.7 months. Although Finbond as a mutual bank is not
       subject to Basel III requirements, FMB registered net stable funding
       ratio of 488% in FY17, far exceeding 100% required from 2018.
   -   The recent positive rating action likely limits further upside rating
       potential over the short term. Medium term positive rating action may
       stem from continued enhancement of earnings and profit potential, while
       maintenance of strengthened asset quality and capital metrics may be
       positively considered. A negative rating action would likely follow a
       significant deterioration in asset quality, earnings, capital, funding
       and/or liquidity profiles.


Pretoria
31 October 2017

Sponsor: Grindrod Bank Limited

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