ASA International Group PLC (ASAI) Earnings Call Transcript & Summary

Good afternoon. My name is Dirk Brouwer, Chief Executive Officer of ASA International. I'm here with my colleague, Karin Kersten, Executive Director of Corporate Development, to announce our fiscal year-end 2021 results. So I'll go to the next slide. Just to give you a couple of highlights. We've been quite pleased with the recovery of our business in most markets in 2021, a substantially better year than 2020. It's not so much reflected in the number of branches, which has grown up a bit in the OLP. But what you can see is that our pretax profit have been gone up substantially. Our PAR actually has come down also substantially. And what we have seen is despite actually a substantial ECL expenses, which we had to take in some markets, and that's primarily India where we still had to make some substantial provisions. The cash balance has remained high. We have still about $91 million of unrestricted cash and cash equivalents, which is roughly little less than the year before, but that's just because we started to increase our disbursement. Just to give you a quick overview of some of the key financial metrics. You can see that our number of clients kind of went down a little bit, but frankly, pretty much stable. Number of branches that we have been growing that's been quite differentiated. Some of the markets where we have faced more difficulties, which have been, for instance, India, we've seen a bit of a shrinkage of the number of branches, but some of the other markets like including Ghana, Nigeria and also Tanzania as well as Pakistan, we have seen actually quite good growth of our branches. So that's -- we added quite a number of branches there. Our OLP has been going down a little bit. That's partially because we -- just because of which countries we have been disbursing funds and also how the currencies have moved, but have been generally quite stable. PAR>30 is compared to 2019, it's quite a bit higher, 5.2%, but it comes from fiscal year 2020 from 13.1%. So it's a true substantial improvement of our -- the quality of our loan portfolio. So we see -- we are very pleased about the progress because we see this trend line continuing throughout the rest of 2022. Cost income ratio also has come down as a result of better performance of our portfolio, and that's reflected in actually our ROAs getting in the positive side, again, it's not at a level where it was in 2019, but we're actually quite confident that we will be going in the right direction and whether we make the same levels as 2019. I wouldn't want to give a prediction yet, but it will definitely be substantially higher than the 1.1%. The average RoAE is basically -- it comes from 34% in 2019 to 6%. This is very much affected by just like the ROA effect by the provisions which we still have taken in 2020 -- sorry, 2021. The income statement, as you can see, profit before tax for $54 million, we went to 2020 to $2.6 million. It now is really recovering quite nicely, probably before taxes, $25.7 million. The net profit is quite a bit lower that has to do with one specific one-off items. Specifically, we had to make -- we have not accounted for as a matter of conservativeness for any deferred taxes in India where we have made quite a large number of provisions, but we wanted to stay on the cautious side in that regard. And also by a one-off accounting change, IFRS accounting change, where we had to make provisions for any future dividends, which we expect to declare from some of our operating subsidiaries. But really that's -- you really -- if you look at it from a profit before tax, you see a solid improvement, particularly regarding relative to 2020. OLP is down a bit. That has a lot of different components to it. The $403 million compared to $415 million is not very down, but it's definitely down from the 2019 numbers but that has a lot to do with the shrinkage of our operations in India, which we've been very cautious. As you may know, our performance in India has been quite challenging with all the lockdowns and the restrictions on our -- the trading for our clients. We really had more difficulties in maintaining a good portfolio and our clients [indiscernible] more difficulty doing their business. So as a result, we've been shrinking the portfolio quite a bit in India that's offset by some of the other countries, which I'll show you a little bit more later but that's primarily the reason. In most countries, now we are really growing our portfolio again with the exception of India, as mentioned, and also the exception of Myanmar as I mentioned -- we will mention and talk a bit later about. The total assets, I won't go through that. Client deposits have increased a bit. Interest-bearing debt is pretty much stable. And the equity base has gone down a little bit. It's just primarily because of the fact that we've been investing a little bit more in the portfolio in some of our -- in other countries than India. Now what you can see our gross yields are back to levels where we were before the crisis hit us, the COVID crisis. It's 35.5% and 33.7% in 2019. You can also see that reflects itself in actually the margins we make and the cost of funding actually throughout the crisis has been very stable across the board. It's about 10% to 10.5%. So that's been good. But clearly, with the yields going up on our portfolio, we -- that reflects itself in higher profitability for the group. Our funding profile has been very much unchanged, not much differences. As you can see, equity base stable, the loans from local banks, which is an important component for us and financial institutions, stable, relatively stable. Microfinance loans is also stable. So by itself, we have had -- throughout the whole crisis, actually, we've had very little difficulty funding our business. And we also were able to continue to maintain quite a high level of number of amount of unrestricted cash and cash equivalents throughout the cycle just to make sure that we were always able to meet any obligations we had to any of our lenders. Now by the last part on this slide, some of our subsidiaries have not fulfilled or -- the covenant requirements by the 31st of December. That's a small amount. It's about $36.7 million have been now received. So it's still an amount which is outstanding. But these wafers relate primarily to our situation in India. Our lenders in India generally only provide wafers after the year ends in -- their fiscal year ends in India, which is the end of March. So those wafers are now forthcoming as we speak. So we don't see any issues that lenders will withdraw funding from any of our entities throughout the world. Just to give you a bit of perspective on the collection efficiency. You may be following us, we generally provide every month, quite a bit of an update, a business update about the situation on the ground. And this is the collection efficiency slide. As you can see, collection is actually -- has really increased over the last year. But if you go from October '21 to March '22, you can see that almost most markets have you seen -- very substantial increases or they were already a year ago, more than a year ago, in relatively good shape. And we -- the only country which is more behind or the only 2 countries is India and as well as Myanmar. But in India, we've seen also good progress on the collections. And we're quite confident that in that market now with the new regulation, which I will talk about a little later, that the collection efficiency will start -- will basically continue to increase further over the next coming months. Myanmar is a little bit more difficult to give a proper assessment. The situation on the ground there is still quite unstable with the military takeover. However, what we have seen in the regions where we are operating, with the [ Barco ] state as well as Yangon, that the situation is really stabilizing, and that more and more clients are basically -- are taking our loans and actually are also able to start repaying the loans, so we get in a slightly more normalized environment we're working out in Myanmar. Then just a brief update on India. What we see is that the collection efficiency for the end of March have been increasing from January to March. It's gone up from 100% to 113%. The bad debt recovery is also improving. This is very important because we have made substantial provisions in India over the last 2 years. I mean you could talk literally of provisions of about $45 million that has really had a big impact on the profitability of previous years starting from 2019 a little bit, but mostly in 2020 and '21. And we see now that, that is truly starts to stabilize. So we are starting to realize more income from these overdue accounts, and that gives us quite a bit of confidence that over a period of time, we will -- and it will take some time, but that we will recover a substantial portion of this $45 million, which has been fully provided for. It's obviously something which we need to evaluate, but the trend line we see is positive, and we just have to continue to see if that is going to continue throughout the rest of the year but if it does and it increases further than we would expect already by the end of this year to see a substantial portion of that amount be recovered. And that will help us quite a bit because once India effectively will not make further provisions, but instead, we'll start recovering overdue and it's partially written off loans that will basically stabilize the business because instead of having a loss in India, we then suddenly might actually at least go breakeven. And then the strong performance of many of our other entities will actually come out more clearly in the total profitability and total performance -- financial performance of the group. Next slide is really a quick update on the 2022 business update. This is a slide which if you would be looking at our monthly updates, it's pretty much the same, where you can still see that the PAR performance is getting at pretty good levels, with the exception again of India as well as Myanmar. Some other countries also still have some issues in terms of PAR, but it is substantially lower. I mean smaller country like Sierra Leone is now at 9.5%, but we're not too worried. It's a very small business. It's just a couple of branches where we face some issues. So we're not particularly concerned about that. Nigeria has gone up a bit over the last couple of months, but we also feel that, that will gradually will recover that over the next coming months. Now this is a slide which also comes generally is on our regular business update. It shows a little bit where the [ gross ] of our business, which countries in terms of clients, in terms of loan portfolio. You can see that India has been very much shrinking from March '21 to March '22 in terms of the number of clients and the OLP is also substantially shrunk. Now that's been offset by many of the growth of many of the other countries, like, for instance, Pakistan, where we almost -- we had a substantial growth of the number of branches to 541. And you can also see that the OLP has gone up by about $9 million so that was a good growth as well. Sri Lanka has a more difficult situation on the ground, but it's a very small market for us. It's been stable in terms of clients. It's gone down a little bit in terms of OLP, but then you can see that Philippines has been -- is not growing that much, a little bit growing against February, but they're still a bit behind March '21, so a year ago, but we see the trend line there also going in the right direction. Myanmar, we discussed briefly already. And you see also Ghana has been growing. It's a client base and also relative to February, they have been stable and they've gone down a little bit, in fact, because partially because of the currency impact which has hit Ghana quite a bit over -- particularly over the last couple of months. And therefore, the portfolio size in U.S. dollars has come down a bit, but actually in local currency in the Canadian [indiscernible] actually, it's gone up quite a bit. So then we have Nigeria, you can see also there we are quite stable in terms of OLP stable -- they've shrunk a little bit relative to 2021, the portfolio of their number of clients. But again, we see good potential for further growth now the market environment has stabilized. I won't go through all the other countries other than to just point out, particularly Uganda has done extremely well. They increased their number of clients from 133,000 to 190,000 and went up from OLP from $24 million to $38 million in portfolio. A quick regulatory update. We are in the final stages with the State Bank regarding our micro finance bank license. We've pretty much completed all the inspections required. We're now awaiting the release of the license. It's unclear yet what it's exactly going to happen. But we are in dialogue with the Central Bank and hope that this is going to be completed relatively soon. Very important regulatory change we've seen in India, which will have quite a substantial impact on our business in India. In India, actually, the RBI put out a new circular, a new regulatory circular about how microfinance will have to comply with and the way it's basically doing its business. A couple of very important points is that the RBI basically removed the interest rate cap and margin cap for loans to our clients. So we are now, as a microfinance institution in India, we are able to price our loans based on the risk we see. Prior to this, we actually could only -- we had to use -- we could only charge the maximum interest rate cap and the maximum margin cap. So it's a double cap effectively. That has made it very difficult to -- particularly in an environment which is so unstable with the lockdowns, the whole impact of COVID to our clients' businesses to really -- it really made it very difficult to actually not lose some money on that portfolio because our clients were really struggling. And with this small margins we could make in the business that really then triggered those fairly substantial or substantial, I should say, provisions on our portfolio. Now this new regulation will help us to avoid that. It would also enable us actually to buy pricing the loans at the risk we see to actually increase the interest rate a bit, not by substantial amounts, but because the margin has been so low, the impact on our bottom line will actually potentially be quite big. Another important part of this new regulation is that all microfinance loans can only be granted to clients as long as it doesn't increase the maximum of 50% of the clients' household income. So the interest could not be higher than maximum 50% of the clients' household income. Now that will also give us certain advantages, particularly with some of the overdue clients we currently have because the overdue clients will find it difficult to get any fresh loans from other lenders unless they fully repaid our loans. So it will help us, in our view, to start recovering some of that overdue amount to further increase that recovery of overdue amount. So we already increased the interest rate a bit. We offer now about 24.5% which is about 2% to 3% higher than it used to be before. And it can range now between 23% and 27% based on the risk we see in each of the loans we provide. So this is a very important point and it really will help the microfinance institutions operating in India, including ourselves, to actually improve the financial viability of the businesses even in a more complex business environment. Sri Lanka has been very difficult -- Sri Lanka for the -- that really have big financial problems as a country. So we -- that also is affecting our business, but it's ticking over. It will hopefully improve, but it might take some time. It's a small business for us. So I won't go into much detail. Myanmar, we already discussed that, so I won't add more to that. Tanzania and Kenya, we are both from a regulatory point of view, are preparing the application for deposit-taking license to be submitted to the Central Bank somewhere in 2022. And now I hand it over to Karin, who will basically give you a bit of a perspective on our -- what our growth is in financial inclusion and also give a perspective on our digital financial services platform, which we're building.

Thanks. Well, let's start on the growth. And if you look to the digital strategy we've launched, there will be 2 dimensions in which we would like to grow. And the first one is from offering mainly loans to also offering savings accounts deposits and payments. So that's beyond loans into savings. The reason for that is that we want to offer complete service to our clients, but also we would like to optimize our funding cost because the cost of funding from deposits of clients will differ significantly from lending in the professional and institutional markets. The second key element in the digital strategy is that we want to offer a new channel to our clients. So not only the face-to-face channel, where we work via cash, but also a digital channel. So that is not the digitization of our own processes, but the offer of the financial services towards our clients. So that's the key element of the digital strategy. And then to the next slide, an update on -- an update on the digital strategy is that we have started to make progress in 3 areas. The first one is the core banking system that we have acquired and that we are now implementing in Pakistan and Ghana. Before buying this new core banking system, we had our own build AMBS loan system but by going beyond loans, in deposits, regulators will look at our system and that's where we want to upgrade it from loans to a core banking system. Then the second part of implementing the digital strategy is offering digital financial services, which is that we are building now on a smartphone, the digital channel that clients could use. And if a client wouldn't have a smartphone, we are planning to offer a soft loan for clients to buy a smartphone. And clients could access ASA, their loan could save and could also make transactions via their own account or -- and we will also make sure that it could be linked to their mobile money account, which is widely used in Africa. For the digital financial services, we are currently working on launching that or starting the proof of concept in Ghana in the first quarter of the next year, and that will be dependent on the technical availability. We also want to have a core banking system implemented and it's due to approval of the Bank of Ghana. Then the third trajectory is about the supplier marketplace. This is not a financial service we would like to offer, but we would want to give an additional service, value-added service, where -- so if you look to our client base, most of the clients are active in the field of trade, and they do need to buy their goods and supplies which they will trade. And as of today, they closed their shop very often, then they go for supply, sometimes even one or twice a week. They go to a wholesale market or another marketplace, and they pay quite high prices for buying those goods because there -- on the one hand, there's a lot of middleman in between, and secondly, there's no volume combination because they are small, rather small on their own. They have to close their shop sometimes. So what we would like to offer and build is a supplier marketplace where we could bundle the volume where the suppliers can gather that volume and offer better prices, where the clients would not lose time for transportation and that the goods could be delivered at the house. Well, why is this interesting for suppliers because the good -- volumes could be bundled, so that's interesting for them in terms of volume. And we were talking to some of the suppliers in Africa, and some of them haven't entered into a digital area. So they also find it interesting to get some experience in the digital field. The supplier marketplace, we're also planning to start our pilot in Ghana. That's a market where mobile phone penetration is quite attractive. Digital Services is accepted, and -- so we're looking to that market and that might be the first launch because that could be tested separate from a core banking system and a digital financial services. So that's planned for the second half of this year. So -- yes, I hand back to.

Yes. I'll finalize -- it's a quick summary of what we just discussed. So all the 2 of the company's major operating subsidiaries recovered or exceeded pre-COVID operating performance in 2021. So that's very positive in our opinion, despite the challenges we still face in India and Myanmar. The performance of most of our other operating countries, particularly Ghana, Pakistan and Tanzania was excellent, in terms of portfolio quality, growth and profitability. In fact, they were better than they've ever delivered actually before. So that's been very positive, even in a situation where COVID was still around for quite a part of the year. As a result of the improved operating performance and the substantial provisions we made for expected credit losses which is basically hit -- has hit the income statement, the balance sheet in 2021, we also -- despite that, we realized pretax profit of $25.7 million, which is substantial and not so much different, frankly, from what we would have -- would be able to -- what we have done in 2019, if you take into account the India situation. So that's positive, and that gives us a lot of confidence that if the India situation is going to be improving and we don't have to make further provisions in India and possibly might expect some decent releases of some of those provisions that the financial situation and financial performance in 2022, could really be quite a bit higher, and we expect to be quite a bit higher than in 2021. So income is $6.4 million, adversely affected by the deferred tax provisions as mentioned before, in the future dividend payments by some of the company's operating subsidiaries, has resulted in a decrease of net income by $2.3 million. And the company took a fairly conservative approach to tax losses carryforwards for India, for which no deferred tax was recognized. So this by itself reduced net income to $5.6 million. So outlook, formal outlook, important. Whilst the impact of the COVID pandemic on the group's operating remains unpredictable. It's expected in our view that the group operating and financial performance will substantially improve in 2022 based on these positive developments during the second half of 2021 and the first quarter of 2022. And this assumes that the impact of the expected food and commodity and energy inflation, which is taking place also in some of our subsidiaries, and the related ForEx movements will not have a major adverse impact on the group. So that's really where we want to close it. I would like to thank you for your attention. And we will -- I will open it up for Q&A.

This is Mischa Assink. I will now discuss the questions that were posted on the webcast. The questions are mostly on the outlook statement for '22 and on the various assumptions that lie under that outlook. So basically, the question is to provide some more color about the expected development of the loan volumes, NIM, OpEx, credit losses and ECL and also the DTA. So maybe we can start with the expectation on volume of loans for the coming year.

Okay. Well, we do think that our loans will continue to grow a bit. We had -- in 2021, we had loans to customers at [ 368 ]. And we do think it will be growing, not by massive amounts, it's more like 5% or so in 2022.

And what's your expectation on the NIMs also considering a change of regulation in India but also the mix of the various countries?

Yes. I think that the net interest margin will increase particularly if you look at it from a group point of view, because we do think that the interest -- if you look at it from the group that we will see better performance in India, and that will help us to improve our NIMs for the coming year -- for this current year.

And what's your view on the level of OpEx?

I would say that OpEx will clearly grow with the growth of our business, again, with -- in absolute terms is the growth of our branch network, growth the number of staff we have. So there will be some growth in OpEx. But if you relate that to the performance of the increase -- increased performance of the portfolio, I do think we have -- we will have some further leverage of our business in a positive sense.

You already discussed in the slides, your expectation on credit losses and ECL, but maybe you can make another comment or more clarify that, how that's captured in the outlook statement?

Yes. Well, we have seen clearly substantial provisions, particularly in India. We don't expect that with the current business environment in India truly improving and our clients starting to be able to do their businesses in the more customary way, and the substantial provisions we've already taken against our books that we would expect that the performance of the group will be positively affected by that.

Okay. And there's also a question about the DTA, the deferred tax asset recognition. What's the expectation for that in '22. I can also give a comment about it. We have taken some conservative approach on a deferred tax asset, mainly for the losses that we had in India due to the high ECL provisions. So we expect that -- those losses can be utilized when India -- India's performance will improve. So that will give an extra addition. And even the possibility to take up deferred tax assets for the remaining losses, if the outlook of India really improves. These were the questions we had on the webcast. So I give it back to Dirk for a closing remark.

Okay. Well, thank you very much for all -- for attending this meeting, and we very much appreciate your ongoing support with our company. And thank you for the questions. I hope we address those properly, and please stay in contact with our Investor Relations department, if you have any further questions. Thank you.