Real People Investment Holdings Limited Rating Outlook · 2019-07-17 · VP-Sr Credit Officer - EMEA Banking Group [email protected] Jean-Francois Tremblay 44-20-7772-5653

FINANCIAL INSTITUTIONS

CREDIT OPINION7 November 2016

Update

Contacts

Christos Theofilou,CFA

357-2569-3004

[email protected]

Antypas Asfour, CFA 357-2569-3033Associate [email protected]

Nondas Nicolaides 357-2569-3006VP-Sr Credit Officer -EMEA Banking [email protected]

Jean-FrancoisTremblay

44-20-7772-5653

Associate [email protected]

Sean Marion 44-20-7772-1056Managing Director -Financial [email protected]

Real People Investment Holdings LimitedSemiannual Update

Summary Rating RationaleThe B3/Not-Prime global scale issuer ratings (negative outlook) of Real People InvestmentHoldings Limited (Real People), mapping to a B3.za/NP.za national scale issuer ratings,reflects the company's still weak profitability and a challenging operating environment inSouth Africa. In particular, potential adverse regulatory changes and a fragile economicenvironment continue to pose risks for profitability, asset quality and funding.

These constraints are balanced against Real People's improved asset quality metrics,strengthened capitalisation and provisioning policies and signs of improvement in itsunsecured lending volumes.

No external support has been imputed in Real People's ratings.

Credit Strengths

» An improved solvency position, although capital levels remain below target

Credit Challenges

» Profitability will continue to provide a weak buffer to absorb credit losses

» South Africa's challenging operating environment continues to pose risks, despite assetquality improvements

» Wholesale funding concentrations remain high and secured lending is increasing

Rating OutlookThe outlook on the B3 long-term global scale issuer rating is negative reflecting the weakprofitability and challenging operating environment.

http://www.surveygizmo.com/s3/1133212/Rate-this-research?pubid=PBC_1048007

MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.

2 7 November 2016 Real People Investment Holdings Limited: Semiannual Update

Factors that Could Lead to an UpgradeGiven the negative outlook and the challenging operating conditions in South Africa's unsecured lending market, there is currentlylimited upside pressure on Real People's ratings.

The outlook may be changed to stable if Real People shows a sustained improvement in its provisioning and capital levels, orprofitability metrics.

Factors that Could Lead to a DowngradeReal People's issuer ratings could be downgraded if, either

(1) adverse changes in the regulatory environment materially impact the company's profitability and business proposition;

(2) the challenging operating environment leads to further material provisioning needs that erode capital.

Key Indicators

Exhibit 1

Real People Investment Holdings Limited (Consolidated Financials) [1]

6-162 3-162 3-152 3-142 3-132 Avg.

Total managed assets (ZAR million) 3,876.9 4,077.6 3,815.4 4,606.9 4,355.0 -2.93

Total managed assets (USD million) 264.7 277.2 314.9 438.0 471.4 -13.43

Pretax Preprovision profits / Average Managed Assets (%) 2.8 8.1 8.1 16.9 23.4 12.84

Net Income / Average Managed Assets (%) -2.2 0.2 -7.9 -6.8 2.5 -1.64

Tangible Common Equity (Finance) / Tangible Managed Assets (%) 12.2 12.3 13.3 14.9 22.9 15.64

Problem Loans / Gross Loans (Finance) (%) - 34.2 53.4 38.0 30.8 34.34

[1] All figures and ratios are adjusted using Moody's standard adjustments [2] IFRS [3] Compound Annual Growth Rate based on IFRS reporting periods [4] IFRS reporting periods have beenused for average calculationSource: Moody's Financial Metrics

Detailed Rating ConsiderationsPROFITABILITY CONTINUES TO PROVIDE A WEAK BUFFER TO ABSORB CREDIT LOSSESReal People has a small franchise focusing on:

(1) purpose-specific unsecured consumer lending in South Africa - primarily home improvement and education finance - through itscooperation with merchants (accounting for 30% of net loans and acquired assets as of June 2016, see Exhibit 2);

(2) the acquisition and servicing of non-performing unsecured debt portfolios in South Africa (35%), including outsourced collectionservices to other credit providers in the banking, retail and cellular phone industries; and

(3) unsecured business lending in East Africa (12%).

An additional 18% of loans relate to its South African discontinued operations (general-purpose lending, cellular receivables and AspireGroup's education receivables1 which are being run-down.



Exhibit 3

Breakdown of Real People's loans and acquired assets as of June 2016

Source: Real People's Unaudited Financial Results

Real People returned to profitability for the fiscal year ending March 2016 (FYE2016), following losses during the past two fiscal yearsamid higher loan impairment provisions. Profitability for FYE2016 was supported by certain non-recurring items such as its debtbuyback programme and the release of foreign currency translation reserve, and in spite of losses from a carrying value adjustment ofits legacy assets. Pre-provision profitability however remains weak as its business volumes remain depressed.

For the three months ended June 2016, revenue was 3% lower and the loss from continuing operations for the quarter was 21% higher,in spite of a 34% reduction in impairments, driven by a 23% year-on-year increase in expenses and heightened challenges in its EastAfrican operations.

We expect Real People's profitability to remain weak over the next 12-18 months, providing limited buffers to absorb credit losses;we expect business volumes to only gradually rebound and the cost of funding to remain elevated, amid challenging operating andregulatory developments (see next section). This is despite lower provisioning compared to the past two fiscal years and a pick-up inthe company's acquired debt business where Real People strengthened its market position following some recent portfolio acquisitions.

Exhibit 4

Profitability to Remain Weak

Source: Moody's Financial Metrics



SOUTH AFRICA'S CHALLENGING OPERATING ENVIRONMENT CONTINUES TO POSE RISKS, DESPITE ASSET QUALITYIMPROVEMENTSWithin the context of already weak profitability, if implemented, the regulatory proposal to cap credit life insurance charges (at ZAR2.0per ZAR1,000 of the insured amount on a reducing balance for developmental loans) represents downside risks. This is roughly half ofwhat Real People currently charges and, if implemented, the new regulation would further depress the company's profitability, as salesvolumes in its unsecured product offering will materially reduce. We expect more clarity on any final regulation and its impact on itsSouth African lending operations within the next few quarters.

In addition, South Africa's challenging economic conditions continue to pose credit risks. Weak economic growth, high unemploymentand still elevated inflation, will likely continue to weigh on consumers' loan affordability, exerting pressure on loan loss provisioningexpenses and collections. Real People's (and other unsecured lenders') provisioning models have been proven to be quite sensitiveto even small changes in ongoing collection and recovery rates or the model assumptions used, with changes typically leading to amaterial impact on loan loss provisions, profitability and capital given Real People's high stock of NPLs and written off loans. As such,in spite of Real People's experience and expertise in credit management and distressed debt collections (specifically in risk pricing andloan collections), Real People's high balance sheet exposure to net NPLs (NPLs net of provisions at 8% of total qualifying capital as ofMarch 2016) and written off exposures held at 'fair value' (at 84% of total qualifying capital) remain a significant risk.

Positively we note that Real People's asset quality has shown signs of stabilization, with recent NPL vintages improving followingcorrective measures taken by management. As of March 2016, NPLs stood at 34.2% of gross loans, down from 53.4% as of March2015, primarily due to the write-off of legacy NPLs. Loan loss reserves strengthened to 89% of NPLs (March 2015: 78%, March 2014:68%), supported by the higher provisions taken last year, although the eventual introduction of IFRS 9 will likely necessitate evenhigher provisions over the next two years.

AN IMPROVED SOLVENCY POSITION, ALTHOUGH CAPITAL REMAINS SLIGHTLY BELOW TARGETReal People's capital increase of ZAR278 million during FYE2015 has been used to strengthen provisioning levels and has also allowedthe company to maintain capital levels above the stipulated minimum. Although Real People is not a registered bank, does not takedeposits and is not regulated by the central bank (the South African Reserve Bank), it is contracted to funders to maintain a minimumcovenanted Basel II capital adequacy ratio of 30%. The total Basel II capital adequacy level stood at 33.0% as of June 2016 (34.5% asof March 2016, March 2015: 34.4%, March 2014: 31.7%).

However, the total capital adequacy level remains below the company's internal target of 36%. In addition, the tangible commonequity (TCE)-to-tangible assets ratio stood at 12.2% as of June 2016 (which remains below the 14.9% as of March 2014) and the Tier1 Capital Ratio at 17.5% as of June 2016 (March 2014: 22.4%). These capital ratios (which exclude subordinated debt and preferenceshares) are lower than our comfort levels and below what they used to be. While management expects to gradually reach its internaltarget through higher recurring earnings and lower risk-weighted assets (given the drop-off of the legacy general lending loan book),any drop in the capital levels will weigh on Real People's ratings.

WHOLESALE FUNDING CONCENTRATIONS REMAIN HIGH AND SECURED LENDING IS INCREASINGFollowing the capital increase, funding and liquidity pressures have eased somewhat in comparison to the previous year. DuringFYE2016, the group raised ZAR803 million funding primarily through its listed bond programme in Kenya and secured funding in SouthAfrica. As of March 2016, securitisation accounted for around 30% of total funding, bilateral loans for 19%, South African listed andunlisted bonds for 16%, Nordic bonds for 13%, subordinated debt for 8%, Kenyan bonds for 8% and preference shares accounted forthe remaining 5%.



Exhibit 5

Securitisation Accounts for an Increasing Portion of Total Funding

Source: Real People

However, high wholesale funding concentrations remain a rating constraint for Real People, as its top six funders accounted for a highpercentage of total funding (around 75%). In addition, the secured debt in its funding structure has been increasing (March 2016: 24%of gross tangible assets; assets minus goodwill and adding back loan loss reserves) and will likely continue to increase in the next 12-18months as the company relies more heavily on securitisations.

SOURCE OF FACTS AND FIGURES CITED IN THIS REPORT

Unless noted otherwise, we have sourced data relating to system-wide trends from the South African Reserve Bank and the NationalCredit Regulator. Company specific figures originate from company reports and Moody's Banking Financial Metrics. All figuresare based on our own chart of account and may be adjusted for analytical purposes. Please refer to the document: “FinancialStatement Adjustments in the Analysis of Financial Institutions” (https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_187419 ) published on 12 February 2016.

RATING METHODOLOGYThe principal methodologies used in this rating were “Finance Companies”, published in October 2015, and “Mapping National ScaleRatings from Global Scale Ratings” published in May 2016.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tabon the issuer/entity page on http://www.moodys.com for the most updated credit rating action information and rating history.

http://www.moodys.com



Notching ConsiderationsGlobal Scale Issuer RatingsThe company's B3/Not-Prime global scale issuer ratings capture the credit risk of senior unsecured obligations. The current positioningof the ratings indicates that there is no structural subordination of unsecured debt holders, as senior unsecured debt remains themajority. Structural subordination could arise for senior unsecured debt holders if secured funding (excluding securitisation) increasesmaterially to above one-third of total funding (excluding securitisation) from 5% as of March 2016.

National Scale Issuer RatingsThe national scale issuer ratings map to a B3.za/ Not Prime.za. These are derived from the B3 global scale ratings and are positionedat the lower end of the mapping range to capture the negative outlook on the global scale ratings. The national scale ratingswere recently lowered from Ba3.za as a consequence of the recalibration of the South African national rating scale following theimplementation of the new national scale rating methodology.

Moody's National Scale Credit Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuerswithin a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale credit ratingsin that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debtissues and issuers within the same country. NSRs are designated by a “.nn” country modifier signifying the relevant country, as in“.za” for South Africa. For further information on Moody's approach to national scale credit ratings, please refer to Moody's Creditrating Methodology published in May 2016 entitled “Mapping National Scale Ratings from Global Scale Ratings”. While NSRs haveno inherent absolute meaning in terms of default risk or expected loss, a historical probability of default consistent with a given NSRcan be inferred from the GSR to which it maps back at that particular point in time. For information on the historical default ratesassociated with different global scale rating categories over different investment horizons, please see https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_189530.



Rating Methodology and Scorecard Factors

Exhibit 6

Real People Investment Holdings Limited.

[1] Cappted Ba, The risk management sub factor score will not exceed the weighted average of scores assigned to a firm's other risk positioning sub factor scores.[2] Capped at B, The operating environment score will not exceed the weighted average of scores assigned to a firm's other non-financial factors.Source: Moody's Investors Service

Ratings

Exhibit 7Category Moody's RatingREAL PEOPLE INVESTMENT HOLDINGS LIMITED

Outlook NegativeIssuer Rating -Dom Curr B3NSR Issuer Rating B3.zaST Issuer Rating -Dom Curr NPNSR ST Issuer Rating NP.za

Source: Moody's Investors Service



Endnotes1 The group has accepted an offer to sell Aspite Group. The effective date of the sale is 1 January 2016, and the agreements are in the process to being

finalised.



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Documents

Real People Investment Holdings Limited Rating Outlook · 2019-07-17 · VP-Sr Credit Officer - EMEA Banking Group [email protected] Jean-Francois Tremblay 44-20-7772-5653