Credit Rating of Ashid Capital NBFI LLC

Rationale/ Key rating drivers

Balanced growth in new small-ticket consumer loans (Unsecured):  In line with Simple’s stated strategy to grow small-ticket consumer loans (through its Simple Credit Scoring Digital Lending Platform), its portfolio under management (PUM) increased by 57.4% year over year to MNT 180,402.6 million in FY22, with the share of small ticket digital loans rising to 72.1%. Within the small ticket digital loans, Simple caters to lower-income and middle-income salaried individuals, targeting an average ticket size of MNT 1.9 million and an average tenor of around 18 months. The company provides loans at yields ranging from 14% to 28% based on the product type. Based on Simple’s 5-year strategy, MIRA expects small ticket digital loans (comprising around 60%-65% of PUM) to remain a focus area for Simple, with 100% expected to be unsecured, including business loans and car loans combined (35%-40%) over the medium term. Considering the borrower profile in digital loans, business loans, and car loans, the focus on efficiency in credit scoring for the former and collections, as well as the initial assessment of the borrower’s credit profile and introduction of digital business loan applications for the latter, remain of paramount importance in controlling credit risk in the medium-to-long term.

Adequate capital levels provide a long runway for growth; critical with increasing leverage: As of FY22, Simple’s Tier-1 capital stood at 40.6% (FY21: 44.4%) with a tangible net worth of MNT 61,759.1 million. Since Simple plans to grow at a 6-year compound annual growth rate (CAGR) of around 17.0%, it will require higher capital given the capital consumption, modest borrower profile, exposure to unsecured credit products, and relatively high credit cost. MIRA expects Simple to maintain adequate capitalization buffers to absorb asset quality pressures. As of FY22, Simple had leverage (debt/tangible net worth) of 2.4x, and on a steady-state basis, the management plans to operate below the threshold leverage of 4.0x. Furthermore, as the leverage continues to increase, Simple is in the advanced stages of raising up to MNT55,000.0 million through the issuance of multiple bonds by 4Q FY23 and aims to maintain leverage below 3.0x on a sustained basis.

Increasing franchise across geographies digitally: Over the past two to three years of operation, the management has implemented new policies and processes and revamped its IT systems in line with its strategy to become granular and enhance its credit monitoring systems for digital small unsecured loans. Regarding geographical diversification of the portfolio, Simple has outperformed the industry (NBFI Sector – UB: 98%, Rural: 2.0% vs. Simple – UB: 82.9%, Rural: 17.1%).

Operational set-up poised to deliver: Simple’s business operations have not yet completely stabilized, although the company is moderately positioned in terms of information technology systems to drive its PUM growth. Given that most peer companies operate on a branch/loan officer-based model, Simple has ample scope for growth using its existing infrastructure. The company plans to maximize the utilization of its existing infrastructure setup to meet near-term growth expectations. Additionally, Simple has identified the need to digitize the business and car loan segments and intends to undertake measures to improve PUM growth in these segments.

Proposed bond issuance (Diversified funding profile) supports funding mix: As of FY22, Simple utilized its parent’s funding lines, with MCS Holdings and MCS Property subscribing to Simple’s Bonds and Subordinated Bonds. In addition to capital injection, the company issued one Asset-Backed Security (ABS) in the open market. In 2022, the company’s assets were primarily funded by borrowing, accounting for 70.6% of the total, followed by equity at 28.9% of the total asset. Simple is currently in the advanced stage of raising bonds amounting to approximately MNT 55,000.0 million by 4QFY23. This bond issuance is critical for growth capital and aims to maintain leverage (debt/tangible net worth) below 3x. A portion of the proceeds will be used to repay existing bonds’ principal.

Liquidity indicator – Adequate: As per the asset-liability statement, as of FY22, Simple’s short-term liquidity (up-to-one year) was adequate, with a cumulative surplus (excess of current assets over current liabilities) of 52% as a percentage of total assets and 73% as a percentage of total liabilities. The management expects the surplus in the up to one-year bucket to be maintained continuously. Simple plans to maintain on-balance sheet liquidity to meet repayments for the next two months, even as the business scale continues to expand. In addition, simple’s cash and cash equivalents totalled MNT 29’017.39 million at the end of December 2022, which would be sufficient to cover its debt repayments and the forecasted interest expense of MNT 19,819 million in the year 2023 without considering any inflows from collections. As of FY22, the liquidity ratio was approximately 21%.

Need for credit costs to stabilize; Impact of digital lending to wane by FY25: As of Q1FY23, Simple’s gross non-performing assets (GNPA) stood at 10.20% (FY22: 7.8%). The company maintained adequate provisions for its impaired loans based on the expected credit loss model by IFRS 9, which replaces the IAS 39 incurred loss model. The measurement of expected credit loss impairment, as per IFRS 9, requires considering the current actual default behaviour (point in time) and the best available forward-looking information on macroeconomic and benchmark data. Simple is projected to reduce its non-performing loans (NPL) in absolute terms and relative terms by 250-300 basis points in the medium to long term. However, MIRA views this as challenging but achievable based on its balanced growth target, enhanced underwriting quality, installation of early warning systems, and strong collection and recovery efforts.

Profitability remains under pressure, although expected to improve with growing scale: Considering Simple’s focus on small-ticket-size digital retail loans, the net interest margin improved (FY22: 10.5%, FY21: 7%) due to an increase in yield. It is projected to achieve a NIM of 13%-15% in the medium term. However, Simple’s profitability might have been constrained by high operational and credit costs (>10%). MIRA expects operating costs to moderate in the medium term as the company grows its PUM (Portfolio Under Management), and operating leverage plays out when the company starts leveraging its current infrastructure, which has been set up over the last few years with improving PUM. Furthermore, if Simple can sustain its growth by increasing operating efficiency, managing funding costs, and lowering its incremental credit costs over the medium term, it will be key to improving its profitability. As of FY22, the return on assets stood modestly at 4.4% (FY21: 0.3%), and the return on equity was 15.2% (FY21: 0.7%).

Strong demonstrated support from a strong parent company (MCS Holdings LLC). MIRA incorporates parental solid support in its Issuer Credit Rating due to the strong parent and its strength of linkage – the ability to support, the propensity to support (including an assessment of historical evidence), and the timeliness of support.

Rating sensitivities

Positive: Demonstrated ability to profitably expand the franchise with sustainable asset quality while continuing to improve the diversification of the funding profile and maintain adequate liquidity and capital buffers, which could lead to positive rating action. Future developments that could collectively lead to a positive rating action include the following:

• Material franchisee growth while maintaining control over asset quality.
• Demonstrating sustained operating buffers.
• Adequate seasoning of borrowers.
• Maintenance of adequate liquidity and capital buffers.

Negative: Weakened operating performance, dilution in the liquidity profile, continued delays in the planned raising of capital beyond 3QFY23, non-improvement in asset quality or operating buffers, and leverage (debt/tangible net worth) increasing above 3.0x on a sustained basis will result in negative rating action. Future developments that could individually or collectively lead to an adverse rating action include:

• Inability to deliver on franchise growth expectations;
• Funding challenges leading to liquidity dilution;
• Material capital erosion resulting in the depletion of buffers;
• Leverage exceeding 3.0x

Outlook: Evolving

The Evolving Outlook continues to reflect Simple’s increasing franchise in the small-ticket unsecured loans segment with increasing diversification in its portfolio under management (PUM) and funding profile and strong support from its parent company, MCS Holdings LLC. Furthermore, Simple is in the advanced stage of raising bonds of about MNT55,000.0 million by 4QFY23, which would be critical for growth capital while keeping the leverage (debt/tangible net worth) below 3x. With the growing scale, MIRA expects the operating leverage to deliver decent profitability metrics.

Company profile:

Founded in 2016 and operating since 2020, Ashid Capital NBFI LLC (RN: 6105572, Address: Mongolia, UB, Sukhbaatar district, 8 khoroo, Central tower, 5th floor), also known as Simple, has positioned itself as a major digital lending platform, driven by a vision to become the leading digital lending platform. Its primary objective is to enhance access to financial services by leveraging credit scoring systems, enabling users to benefit from loan terms tailored to their creditworthiness.

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