22.08.2024 - Despite the challenges of falling interest rates and rising costs, longer maturities and stronger customers are driving growth. Active customers have increased, and the group's financial metrics show positive trends.
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Fitch Assigns Iute Group AS 'B-' Long-Term IDR; Outlook Stable
Fitch Assigns Iute Group AS 'B-' Long-Term IDR; Outlook Stable
Fitch Ratings-Frankfurt am Main-26 July 2024:
Fitch Ratings has assigned Estonia-based Iute Group AS (Iute) a Long-Term Issuer Default Rating (IDR) of 'B-'. The Outlook is Stable. Fitch has also assigned the senior secured notes issued by IuteCredit Finance S.à r.l., which is a fully owned subsidiary acting as a financing intermediary for Iute Group, a rating of 'B-' with a Recovery Rating of 'RR4'. The notes are unconditionally and irrevocably guaranteed by Iute and its subsidiary IuteCredit Albania SHA.
Key Rating Drivers
Small Franchise; Adequate Profitability: Iute's ratings are driven by its standalone credit profile. They primarily reflect its small franchise in unsecured micro lending to under-banked clients in low-rated eastern and south-eastern European countries and adequate profitability, but also its high leverage for its business scale and profile.
Iute's ownership of Moldova-based Energbank contributes positively to Iute's scale, asset quality and funding access. However, fungibility of funding, liquidity and profitability between Iute and Energbank are limited due to regulatory restrictions, which limits the overall benefit for Iute's credit profile.
Exposed to Higher-Risk Markets: Iute is headquartered in Estonia (A+/Stable), but its operations are concentrated in Moldova and Albania, which made up 52% and 31% of total loans at end-2023, respectively. Iute's other two key markets are North Macedonia (13%, BB+/Stable) and Bulgaria (4%, BBB/Positive). Fitch considers the operating environments in Iute's core markets to be volatile, which is reflected in the sector risk operating environment assessment of 'b'.
Digital Lending Underpins Business Model: Iute positions itself as a fintech company, specialised in unsecured micro-finance and payment services for under-banked customers. Its digital capabilities are key to its competitive positioning in terms of service quality, speed and overall risk management, which is the main reason it focuses on less digitally developed markets. Fitch believes that Iute's digital expertise is a key strength, but regulations, especially on interest rate caps and rising competition in local markets, constrain Iute's franchise.
Moderate Benefits from Bank Subsidiary: Iute acquired Energbank in Moldova in 2022, which constituted around 27% of group consolidated lending at end-2023. Energbank is a well-capitalised and very liquid bank, and its loans are mostly secured, but profitability is low. Iute is restructuring the bank to improve its efficiency. Fitch also notes that bank resources (liquidity, deposits and capital) are not fungible across the group, limiting the benefits of Iute's ownership of Energbank for Iute's creditors.
FX-Induced Market Risk: Iute mainly funds itself from developed markets in euros while its receivables are mostly in local currencies, resulting in a considerable short position, leading to material foreign exchange (FX) sensitivity. As of end-2023, the company was EUR113 million short in euro, accounting for 1.8x equity (end-2022: 2.4x equity), exposing it to potential losses in case of a major devaluations of local market currencies.
High NPL Ratio: Fitch views Iute's risk controls, underwriting and collection practices as adequate for its size and business model. However, Iute's portfolio reflects the high-risk profile of customers in higher-risk operating environments and its non-performing loans (NPL) ratio at end-2023 was a high 11.9% (14.6% excluding the bank).
Low Loan Loss Coverage: NPLs were 66% covered with provisions at end-2023 (2022: 71%), which is low in Fitch's view, given Iute's focus on unsecured lending. Unprovisioned NPLs equalled 20% of tangible equity at end 2023. Iute's cost of risk (defined as impairment charges/average gross loans) was 9.5% in 2023 (2022: 10.6%), which is high but in line with international peers operating in higher-risk unsecured lending markets
Bank Subsidiary Drags onProfitability: Iute's profitability reflects the high yields intrinsic in its business model as well as improving diversification. Its wide net interest margin (NIM; 25% in 2023, 29% in 2022) covers operating expenses and provisioning costs. However, regulatory caps on lending rates, lower lending rates at Energbank and rising competition are putting pressure on Iute's NIM. Loan impairment charges consumed 73% of Iute's pre-impairment operating profit in 2023 (2022: 81%), reflecting the features of its business model.
Iute's pre-tax income/average assets ratio was 3.7% in 2023, dragged down by high operational expenses and low profitability at Energbank. We expect successful execution of Energbank's efficiency improvement plan to be a key medium-term driver of the group's overall profitability.
Modest Core Capitalisation: Iute's gross debt/tangible equity ratio was 5.5x on a consolidated basis and comfortably met Iute's debt covenants in 2023. However, given that bank equity is not fungible, Fitch considers that Iute's leverage ratio at the level of the non-bank holding company should be stressed to reflect the risk for unprovisioned NPLs, intangible assets and for the loss-absorbing capacity of the investment in Energbank shares. Iute's ability to quickly liquidate its investment in Energbank under a stress scenario limits its immediate loss absorbing capacity (on a standalone basis).
Increasing Funding Diversification; Mid-Term Maturities: Iute Group's main funding resources were its Eurobond issuance (37% at end-2023), customer deposits at Energbank (37%) and funding via the Latvian Mintos Platform (15%). Energbank deposits contribute positively to the group's consolidated funding structure but Fitch notes that deposits are not fungible, limiting the benefits for the overall group. Fitch views Iute's proven access to international debt markets positively. However, we also note Iute's considerable mid-term refinancing needs with a EUR110 million Eurobond maturing in October 2026.
