Fitch Affirms Swiss Capital at 'B-'; Withdraws Ratings
Fitch Ratings has affirmed JSC MFO Swiss Capital's 'B-' Foreign and Local Currency Long-Term Issuer Default Ratings (IDRs) and 'B' Foreign and Local Currency Short-Term IDRs. The Outlooks on the Long-Term IDRs are Stable.
Fitch subsequently withdrew all the ratings for commercial purposes. The ratings were withdrawn for the following reason: for commercial purposes.
Key Rating Drivers
Swiss Capital's Long-Term Issuer Default Ratings (IDRs) reflect its modest franchise in secured high-cost lending in Georgia, concentrated funding profile and opportunistic strategy. The ratings are underpinned by strong profitability and low leverage.
The impact of the coronavirus pandemic on the operating environment is material. However, our Stable Outlook is a reflection of Swiss Capital's sound pre-impairment profitability, strong capitalisation and low funding needs, which should mitigate higher credit costs in 2020 above our tolerance levels for the current rating.
Swiss Capital offers high-cost secured loans to marginal urban borrowers. The loans are collateralised with used cars (61% of the gross loan portfolio at end-2019), gold (23%) and real estate (11%). Swiss Capital had to revise its business model after the National Bank of Georgia introduced a 50% interest rate cap and mandatory creditworthiness checks on borrowers in 2018. The company has shifted towards less risky, but lower-yielding clients and products, such as gold-backed loans.
Nevertheless, profitability remains a credit strength (pre-tax income over average assets of 8% in
2019), supported by the wide spread between portfolio yield (32% in 2019) and cost of funding (13%). Swiss Capital has high marketing, labour and credit costs, but managed to control them adequately in relation to the lower interest income.
Swiss Capital's business model is reflected in inherently weak asset quality (impaired loans ratio of 14% at end-2019). However, pre-impairment profitability has historically absorbed Swiss Capital's high credit costs and the company manages collateral repossession and monetization adequately via its own dealers, usually in less than a month.
Swiss Capital's rating is supported by its sound capitalisation (gross debt to tangible equity ratio was 1.3x at end-2019). Fitch deems it commensurate with the business model, the planned growth and present downside risks. Unreserved non-performing loans were 6% of its total equity. Funding needs are low due to the high share of equity and the company is replacing funding from individuals with secured bank loans.