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Rating Action:

Moody's assigns first-time Caa1 long-term issuer ratings to Oragroup S.A., with positive outlook

08 Aug 2019

Limassol, August 08, 2019 -- Moody's Investors Service ("Moody's") has assigned first time Caa1/Not Prime long and short term local- and foreign-currency issuer ratings to Oragroup S.A. (Oragroup). The long-term issuer ratings were assigned a positive outlook. As part of its analysis, the rating agency also assigned a notional baseline credit assessment (BCA) and notional adjusted BCA of b3, based on Oragroup's consolidated financial statements.

Oragroup's b3 notional BCA reflects the firm's sound profitability driven by robust credit growth and exposure to West Africa, as well as the firm's sound deposit-based funding and solid liquidity. The aforementioned strengths are moderated by the firm's weak asset quality (with a high stock of legacy problem loans and challenging conditions in Central Africa), as well as its relatively low core capitalisation.

Oragroup is a Togo-based bank holding company which owns shares in a pan-African network of banks with presence across 12 countries. Oragroup had total assets of $3.1 billion as of December 2017.

A list of assigned ratings is provided at the end of this press release.

RATINGS RATIONALE

STANDALONE BCA

-- ROBUST CREDIT GROWTH AND EXPOSURE TO WEST AFRICA DRIVE SOUND PROFITABILITY

Moody's expects Oragroup's sound profitability to gradually improve. Net interest margins will remain broadly stable as margin compression in Central Africa balances the solid credit growth in West Africa, while non-interest income will increase on the back of foreign exchange transactions and securities trading.

The rating agency expects the firm's efficiency to improve progressively. However, the cost of risk will increase amid tighter regulatory requirements in the West African Economic and Monetary Union (WAEMU).

The firm's net interest margins declined slightly to 3.6% in 2017 from 3.7% in 2016. Oragroup's efficiency was relatively low, with a cost-to-income ratio at 68% in 2017. Oragroup's cost of risk, computed as loan loss provisions as a percentage of gross loans, declined to 38 bps in 2017 from 103 bps in 2016.

-- SOUND DEPOSIT-BASED FUNDING

Moody's expects Oragroup to remain primarily deposit-funded. Customer deposits represented 62% of the firm's total assets as of December 2017, and the firm's net loan-to-deposit ratio was sound at 97%. However, the bank's limited deposit gathering franchise in several markets will constrains its funding profile.

Oragroup's reported market reliance is relatively high, but primarily reflects central bank refinancing of sovereign debt holdings, similar to other banks in the region. As of December 2017, the group's market funds/tangible banking assets stood at 22.7%.

-- SOLID LIQUIDITY

Moody's expects Oragroup to maintain sound liquid resources, though noticeably lower than at most peers operating in sub-Saharan Africa. As of December 2017, the bank's liquid banking assets/tangible banking assets stood at 31.4%, compared to 32.1% as of year-end 2016.

-- OPERATING ENVIRONMENT CONSTRAINS ORAGROUP'S CREDIT PROFILE

Moody's uses a "Very Weak+" Macro Profile assessment for Oragroup, which is the weighted average of the Macro Profiles or proxy Macro Profiles of the principal countries in which the group operates. Specifically, the rating agency uses the weighted average of Côte d'Ivoire's "Weak-" and Togo's "Very Weak+" Macro Profiles. The Government of Togo has a B3 stable rating.

-- WEAK ASSET QUALITY AT STABLE LEVELS, REFLECTING LEGACY PROBLEM LOANS, DELINQUENCIES IN ACQUIRED PORTFOLIOS AND CHALLENGING CONDITIONS IN CENTRAL AFRICA

Moody's expect Oragroup's asset quality to remain relatively weak, though gradually improving.

The weak asset quality reflects the combination of a high stock of legacy problem loans in the firm's historic portfolio, high delinquencies in some portfolios acquired through inorganic expansion, as well as the impact of economic deterioration in Central Africa amid low commodity prices. Technical factors have also contributed to the high problem loans, such as the tightening of classification and provisioning regulations in the WAEMU in 2018, along with historical regulatory constraint on banks' ability to write-off delinquent exposures.

As of December 2017, the Oragroup's problem loans-to-gross loans ratio stood at 14.5% (14.8% as of December 2016). Oragroup's coverage is sound, with loan loss reserves accounting for 76% of problem loans at year-end 2017.

The expected gradual improvement in asset quality will result from the ongoing cleanup of the legacy and acquired portfolios, along with the harmonisation and strengthening of the risk framework across the group completed 2016. In the commodity exporting Central Africa region, firmer hydrocarbon prices supporting the economy, along with the ongoing diversification of the portfolio, will help improve asset quality. Also, new regulatory requirements for mechanical write-offs in the WAEMU will over the coming years drive a sizeable technical improvement in the firm's problem loans ratio.

-- RELATIVELY LOW CORE CAPITALISATION MATERIALLY LIMITS ABILITY TO ABSORB SHOCK

Moody's expects Oragroup's core capitalisation to remain relatively low given the firm's rapid growth, but improve gradually. The expected gradual improvement will reflect the firm's sound profitability, its capital increase completed in 2018, as well as the Central Bank of West African States' (BCEAO) phased-in implementation of the Basel II/ III framework.

The firm's core capitalisation is relatively low, when adjusted for (1) minority interests, a capital component unlikely to provide absorption at the holding company level, and (2) the risk-weight on some of the group's government securities holdings, in line with the Basel II framework.

As of December 2017, the firm's tangible common equity (TCE) to risk weighted assets ratio stood at 4.4%, which is below the 11.2% median for global banks with b3 BCA. However, Oragroup's reported capital figures, with a Basel III Tier 1 ratio of 9.6% and a total capital adequacy ratio of 10.1% as of December 2017, were above the regulatory minima for the WAEMU.

LONG-TERM RATINGS

-- LOW LIKELIHOOD OF RECEIVING GOVERNMENT SUPPORT IN CASE OF NEED

Oragroup's Caa1 long-term issuer rating does not incorporate any government support uplift. This reflects our assessment of a low probability of government support in case of need, given the absence of government ownership, the holding company nature of the firm, as well as the relatively small size of Oragroup in most of its markets. The rating of the Government of Togo is B3 stable.

-- NOTCHING CONSIDERATIONS

Oragroup is a non-operational financial holding entity, with a Caa1 issuer rating positioned one notch below its b3 notional adjusted BCA. This is because holding-company creditors are subordinated to banking subsidiaries creditors in bankruptcy or resolution, and are thus likely to experience higher losses.

The one notch for structural subordination also captures the level of double leverage at Oragroup. The double leverage measures the incremental liquidity risk taken on by the holding company, as a result of the holding company borrowing in order to invest in the equity of its subsidiaries (thereby creating reliance on dividends to finance interest expense).

Oragroup's double leverage is high, but the liquidity risk is moderated by (a) the sizeable portion of Oragroup's debt owed to its own shareholders, as well as (b) the sizeable portion of Oragroup's revenues that are not in the form of up-streamed dividends from its subsidiaries. We expect the firm's double leverage to remain broadly stable.

WHAT COULD MOVE THE RATINGS -- UP/DOWN

Upwards pressure on the firm's ratings could develop through (a) a material improvement in both the asset quality and capitalisation of the firm, and/or (b) a significant improvement of the operating environment, as would be captured by an improvement in the Macro Profile.

Downward pressure on the firm's ratings could develop through: (a) a material deterioration in its funding and liquidity, and/or (b) a sizeable decline in the profitability.

RATINGS OUTLOOK

The positive outlook reflects Moody's expectation that Oragroup's solvency profile will gradually improve, with stronger asset quality and capitalisation.

LIST OF ASSIGNED RATINGS

Issuer: Oragroup S.A.

..Assignments:

.... Adjusted Baseline Credit Assessment, Assigned b3

.... Baseline Credit Assessment, Assigned b3

.... Long-term Issuer Ratings, Assigned Caa1, Outlook Assigned Positive

.... Short-term Issuer Rating, Assigned NP

..Outlook Action:

....Outlook Assigned Positive

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks published in August 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The local market analyst for these ratings is Mik Kabeya, +971 (423) 795-90.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Constantinos Kypreos
Senior Vice President
Financial Institutions Group
Moody's Investors Service Cyprus Ltd.
Porto Bello Building
1, Siafi Street, 3042 Limassol
PO Box 53205
Limassol CY 3301
Cyprus
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Sean Marion
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Cyprus Ltd.
Porto Bello Building
1, Siafi Street, 3042 Limassol
PO Box 53205
Limassol CY 3301
Cyprus
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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