Global Credit Ratings (GCR) has upgraded Trust for Urban Housing Finance (TUHF) Group’s national scale long-term rating to BBB(ZA) and affirmed its short-term rating of A3(ZA). Furthermore, GCR has affirmed the international scale rating assigned to TUHF of BB-. The ratings have Stable outlooks.
Omega Collocott, Head of Financial Institution Ratings at GCR, says the ratings reflect entrenchment of TUHF Group in inner-city mortgage finance, together with its sustainable operating model, clear strategy, strengthening risk and operational practices, increased geographic spread, and support from an increasingly diversified equity and funding partner base.
Collocott says, “The finalisation of a R200m grant by National Treasury’s Jobs Fund, which is to be used as a catalyst for raising an additional R800m in listed bonds through a Domestic Medium Term Note (DMTN) Programme, has bolstered TUHF Group’s medium-term growth trajectory.”
During its financial year ended 31 March 2016 (FY16), TUHF Group concluded all the Jobs Fund related funding agreements and received R87.5 million in grant funding. The group is far advanced with the launch of its maiden R280 million issue of senior secured debt under its R1 billion DMTN programme, which is JSE approved, and is expected to close during September 2016.
“Liquidity risk has remained stable and modest,” says Collocott, “Rising short-term mismatches associated with the shorter tenor of new funding is expected to be mitigated by enhanced treasury and funding management sophistication.” She adds that future funding choices may raise exposure to interest rate and/or currency risk, but are likely to be hedged.
TUHF’s net loans rose 4.9% in FY16, driving total operating income growth of 11.9% to R120 million and pre-tax profit moderated to R35 million from R44 million in FY15. The decline in pre-tax profit was largely as a result of higher operating expenses associated with regional expansion, implementation of new operations and treasury management systems, and reporting in support of grant requirements.
Slower loan growth, due to funding constraints, slightly lower interest margins and a higher cost base reduced TUHF Group’s internal capital generation. However, the injection of grant funding (Tier 2 capital) boosted the capital to assets ratio to 15.3% against a long-term target of 10%, which GCR deems adequate in light of business composition and risk.
Asset performance is generally considered to be strong. While past due loans were 8.8% of gross loans at FY16 (FY15: 8.0%), credit losses have remained in the 0.6% to 0.8% range, given the adequacy of provisioning, and the significant quantum, quality and perfectibility of collateral in place.
Collocott says maintenance of the group’s financial performance, asset quality and financial profile, together with significant increases in scale, strategic implementation and funding diversification could have a positive impact on the ratings.
“However, deteriorating asset quality, unmanaged liquidity risk, looser credit policies, and/or un-remedied covenant breaches could result in downward rating action,” Collocott says.