GCR Downgrades LAPO Microfinance Bank Ratings

By Aduragbemi Omiyale

The national scale ratings assigned to LAPO Microfinance Bank Limited have been downgraded to BBB(NG) and A3(NG) in the long and short term respectively.

The ratings were lowered by Global Credit Ratings (GCR) with the outlook accorded as stable following the review of some parameters.

In a statement issued by GCR, it LAPO’s asset quality (loan and advances) remains highly susceptible to macroeconomic vagaries, particularly the COVID-19 pandemic and the recent nationwide protest, which it said was evidenced by the deterioration in gross non-performing loans (NPL) ratio to 21.4 per cent at 3Q FY20 in contrast to the 10.3 per cent achieved at FY19, far beyond the tolerable limit of the Central Bank of Nigeria (CBN) at 5 per cent.

The local rating agency submitted that the weak net NPL ratio of 11.7 per cent at 3Q FY20 (FY19: 2.1 per cent) portrays inadequate provisioning, while the risk of capital erosion appears significant, considering the deteriorated net NPL/capital ratio of 31.8 per cent at 3Q FY20 (FY19: 5.8 per cent).

“Having displayed strong financial performance over the review period to FY19, LAPO registered a net loss of N1.6bn in 3Q FY20.

“This was attributed to the tough operating environment, exacerbated by both the COVID-19 pandemic and the recent nationwide protest, which adversely impacted on loan repayments and collections.

“While management had indicated some remedial actions to improve loan collections, GCR expects the weak financial performance to persist over the short term,” the statement obtained by Business Post said.

However, GCR recognised the dominant position maintained by LAPO within the Nigerian microfinance banking space, accounting for a sizeable 21.5 per cent of the subsector’s total loans and advances as at 31 December 2019.

“LAPO’s capitalisation is considered adequate for its current risk level, with a risk-weighted capital adequacy ratio (CAR) of 32.6 per cent registered at FY19 (FY18: 29.3 per cent).

“While the bank registered a notable year-on-year 23.5 per cent growth in shareholders’ funds in FY19 largely driven by internal capital generation, a combination of net loss as at year-to-date and increased risk-weighted assets moderated the CAR to 25 per cent at 3Q FY20, albeit remained well above the regulatory minimum of 10 per cent.

“Liquidity risk appears well managed, with the bank’s key liquidity metrics comparing favourably with regulatory requirements.

“Specifically, the bank’s statutory liquidity ratio ranged between 26.8 per cent and 37.2 per cent throughout FY19 (ending the year at 37.2 per cent), compared with the 20 per cent statutory benchmark,” it said.