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

Good afternoon. I'm Dirk Brouwer, CEO of ASA International. I have 3 colleagues with me here: Karin Kersten, Executive Director, ASA International; I have Tanwir Rahman, who is the CFO; and Mischa Assink, who is Head of Investor Relations. I just want to give a quick update about the business for 2022. We have a brief results presentation, which I would like to take you through together with my colleagues. So I would like to go to the next slide. Just to give you some quick highlights with regards to fiscal year 2022 profits. We have seen substantial improvement in net profits for the year as well as pretax profits. So our client base has actually increased from -- to 2.3 million which excluding India was actually quite a large and gross number because the Indian business was actually quite challenged. In terms -- and we've been shrinking that. Branches have been at 2,028. As mentioned, pretax profit is about 80% and net profits have been growing by about 181%. So in that respect, we feel quite comfortable that the business is really recovering. Our OLP is about $315.2 million [sic] $351.2 million. PAR >30 increasing or basically stabilizing at 5.9%, which was prior -- was excluding India, it was actually 3%. ECL expenses was $0.6 million and unrestricted cash stayed very stable, has gone down a little bit, but we really repaid some of our loans in some countries, but that's very stable for the size of the business at $55 million. You can see on the next slide, some performance in terms of our different regions, South Asia, West Africa, Southeast Asia as well as East Africa. And what you can see very distinctly is that we've seen quite a substantial shift towards East Africa, which has been growing its business very well in most markets there. On the other hand, where we've seen quite a lot of shrinkage actually, we've seen in South Asia, the OLP numbers has come down quite a lot, particularly because of India. The business in Pakistan, you can see that has gone down from about $96.9 million to $35.7 million . Pakistan has actually been quite stable despite the fact that we've seen a substantial currency depreciation in Pakistan over the last year. Sri Lanka, very small business, has had a lot of difficulty. As you probably know, the country has essentially gone bankrupt. But the business there is still taking over and we have some hope that over a period of time, that business will start to improve as well. On the right-hand side, you see the West African business. As mentioned, we've seen good -- generally good growth there. It's obviously still a little lower than it was before, but nevertheless, it's -- and that has to do a lot with Ghana. With Ghana, we've seen substantial currency depreciation last year, and that will still feed itself a bit during this year as according to our estimates. Southeast Asia, very stable, as you can see. Philippines has been growing its business by over 10%. And Myanmar has been shrinking. Myanmar is actually quite a complex situation right now because we cannot really put money in neither can we take money out. So we run the business as it currently is with the funds we have and it's a very challenging situation with the current situation with the military fighting to an extent to its local population as well as the former leadership of the country being incarcerated. So it's challenging, but we still run the business, and we hope that we can continue to do so for quite some time. On the East Africa side, you can see the strong growth we've seen there, 39% as a whole. Tanzania has been growing by almost 51%. Kenya also has been growing, Uganda by 35%. Rwanda, as you can see, all of those countries have been growing their businesses quite well. And they've really diversified the whole group's portfolio, I would say. Next slide is the overview of the key performance indicators. What goes through this, you've probably seen quite a lot of that, but the fiscal year 2022, number of clients has been a little flat because -- particularly because of the shrinkage of the business in India. On the other hand, we've seen many other of our local institutions doing quite well. And particularly, as I've shown you yesterday -- of this yesterday -- today, the performance, the growth of our business in East Africa. Number of branches, as you can see, has come down a little bit, but still been growing quite substantially vis-a-vis 2020. Average gross OLP per client in U.S. dollars has come down quite a bit. That has to do a lot with the depreciation of the currency in Ghana as well as the depreciation of the currency in Pakistan. And those 2 countries has really brought down the OLP per client and we just have to see how that's going to further develop going forward. The PAR>30 has come down quite substantially from 13.1% in 2020 down to 5.9%. So we're quite pleased that the portfolio quality across the board is truly improving. Then we see cost of income as well. Clearly, 98% was not particularly viable cost of income ratio. It's come down now to levels which we think are much more reasonable. At the same time, we would still hope to see further cost/income ratio to go down even further. The ROAA has gone down from almost 0 or a little less than 0 in 2020, has come down already to 3.4%. The RoAE is effectively increased to 18.5% from a negative number in 2020. So the trend lines itself in our opinion, are actually showing a good delivery -- a good improvement of performance. I now hand it over to Tanwir.

Thank you, Dirk. We finalized our income statement and balance sheet for fiscal year 2022 as consented by EY U.K. Again, PBT of $46.3 million, net profit of $17.9 million. We experienced unusual tax expenses for the year due to a reversal of deferred tax assets in India and Myanmar, but that was in accordance with IFRS. Profitability and good trajectory towards pre-COVID levels, strong balance sheet despite enormous headwinds of currency devaluation. In spite of strong profitability. Our book took an approximately $34 million hit for currency devaluation in 2022. Going to the next slide. We see a slight improvement in margin and yield, mainly because of subsidiaries with higher yields, increased their disbursement throughout the year in 2022. We will see India and Sri Lanka's interest rate cap removal that will have an effect, and that will help in 2023. Cost of funding broadly stable, although there might be an increase in 2023 due to the benchmark rates going up. Next slide, the risk averse strong unchanged funding profile. Our mix is a combination of equity, microfinance loan funds from people like Symbiotics, local deposits, loans from development banks and foundations like OPIC, BIO, and OeEB and then we have the commercial loans. $157 million in fresh debt that was raised. We remain well capitalized with $56 million of cash and cash equivalent on the balance sheet. Strong pipeline of $194 million fresh loans, of which 63% with agreed term sheets. We did have a breach covenants amounting to $82.5 million, but we did manage to get waivers for $81.5 million. Year-on-year, lenders have been extremely supportive of our business. With that, I'll pass it on to Karin.

Thank you, Tanwir. Then let's go to the March 2023 business update. So we are now beyond our annual figures of 2022, and we would like to give you a snapshot into the loan portfolio and the quality of the portfolio. First of all, we would like to remark, if you look at the gross OLP per the March figures, so that's the third column on the sheet, you can see that the order in sizing of the countries has shifted. So whereas India was a very, very large country up to now, you can see that in order of magnitude, Pakistan has the biggest portfolio in dollars. So it is $64 million gross OLP. Then the second country in Tanzania. And you could see that in Dirk's part of the presentation that Tanzania had the largest growth in 2022. Then the third largest country is the Philippines in March. The fourth is India. That is the total portfolio and remark here is that our BC, so Business Correspondent portfolio is growing there. So this is in line with our shrinking strategy. And then the fifth largest country in terms of gross OLP is Ghana. Then if you look to the quality of the portfolio, at the end PAR>30 was 5.9% as presented in the annual figures. And you can see it improving in the course of this year, with a PAR of below 5%, 4.5% at the end of March 2022. That's an important marker to have a below 5%. If you look into that column and you map that to the largest countries, you see that most of our large operating countries are very healthy. And in the top 5, I mentioned, the PAR in India has attention. So you see it 15.9% recently, but it has come down. The key reason is write-offs and no overdue loans, so have been written off in India, Myanmar and Nigeria. So that's partly an explanation for the improvement in the PAR. If you look to the PAR>30 less PAR>180, so in word it is loans that are overdue longer than a month, but shorter than half year then you see that Nigeria and India have larger numbers, although India is smaller than the PAR>30. So you could say that -- that's a good signal that PAR is lower. On the Nigeria PAR, there is a special situation, not only with the elections having taken place in Nigeria, but also the PAR is higher because there were severe cash shortages in Nigeria because of new bank notes given out and that was affecting the repayment ability of our clients. If you look to our collection efficiency, you can see that in most of our operating countries, we are at 100% or between 95% and 100% with 2 outliers, which just have been touched upon, which are India and Nigeria. And for the countries at 95%, you can see that over time, they are gradually improving from the range like Sri Lanka 91%, every time period to 95% now. And Sierra Leone also slightly is improving there. Then if we go to the regulatory update then for our most important market. So in Pakistan, the State Bank of Pakistan has -- we have received a micro finance banking license from them, and we're now expecting to receive the formal certificate of commencement. The dividend has been approved, but we are now waiting for the approval of the remittance of the dividend. Then if we go to India, and this is the regulation since 2022. Since last year, the new regulation, which is quite favorable as the interest rate cap and the margin cap have been renewed, removed, which allows us to raise the client rates. We haven't seen the real benefit of that because our disbursements was very low. But once the profitability is turning back, then we will have some cash to give, also to disburse some new loans and take profit from the removal of these 2 caps. Then if we go to Sri Lanka, the same applies. So also a removal of the interest rate cap. Then in Myanmar, there was a limitation of servicing foreign loans, repaying foreign loans because there were severe controls on the foreign reserves. But then in August of last year, a new circular was being issued that some transactions were permitted. Then good news in Ghana, there we had applied for our digital financial services. So we applicated for that. And approval was being given. And so we now have the approval from the Bank of Ghana to go ahead on our digital financial services strategy. And in Nigeria, there we are awaiting some approval of dividends. So that takes a bit of time there. There is some delay, the dividend of 2021 is approved by now. And the next step after approval also is transferring or getting dollars in order to pay out that dividend. Then on Kenya, last year, a new act took effect, the Digital Credit Providers Act, which basically prohibited MFIs to take collateral. We are a credit taker, so we had to -- well, for the time being, refund the cash collateral. In the meantime, we have submitted a pro forma application to the Central Bank for the Digital Credit Provider, but our large track is to acquire a license for deposit taking because Kenya is high on our list for the digital strategy. For Tanzania applies the same. So it's not on the sheet, but we also are in the preparation phase of applying for a deposit-taking license. Then the strategy, and this is not a renewed sheet but a repetition of what we set as our strategy from 2021 to 2025. You do see 6 boxes shaded on the sheet, and those all have to do with our digital strategy going forward. So you do see that half of the boxes are related to digital strategy, so that's important to implement. Basically, the strategy comprises of growth. So we want to grow the loans, the loan volumes, the number of clients. So that's the organic growth. And then we would like to add a digital channel on top of the proven branch model. So it's not a replacement, but it's on top of because we want to keep our proven credit methodology and our close vicinity with our landing close to our clients. And then the third part of the strategy is to broaden products and services. Up to now, we are active in loans and deposits as cash collateral or in some markets where we have the license in deposits from the clients. but we would like to extend it to online loans to payments, deposits more broadly and also to provide financial value-added services as the supplier marketplace. And by offering that, we are into get new clients on board. Well, what are the benefits of this digital strategy? Well, partly its defensive because we do know that other parties are also looking into digital offerings, and we want to offer this to our clients as well. The other part is offensive because we want to keep happy clients, retain them and deliver better service, more services and products and an enhanced channel. It also will allow -- if we digitalize, we can also digitize our internal processes and we'll have less manual work, and we can use that time for loan officers to serve more clients or to put time in collecting overdues. We will have a different risk profile. So our loan officers are able to spend more time with clients if that's launched and the client centricity goes up by that. But as sort of operational fraud risk will go down because the cash part of the money is small when you go digital. But on the other side of the coin, the IT security risk will go up. We aim to improve the management and credit decisions because we'll have more data. We also will have other sources of income on top of our client interests payment income because once we go into the payment area, we might get income sprint from payment aggregators and also income from suppliers if the supplier marketplace app is being launched. We will get funding benefits by means of higher client savings. So the money collected from our clients will pay a lower interest on that when gathered from the institutional markets. And we'll have a more diversified income and benefits portfolio. Where are we in the progress on digitalization? At the moment, we are implementing the core banking system terminals in Pakistan. That's on schedule and expected to be implemented at the end of the year. And right after that, we will finish the implementation in Ghana. Secondly, the digital financial services app will be implemented in Ghana once the core banking system software is implemented there. And then thirdly, the supplier marketplace app is being developed. It's ready, and it's now being tested in Ghana or better to say, the first clients have installed the app on their phone and the first few orders have been placed. So yes, on the right-hand side, you do see a little snapshot of a mobile phone. And so yes, we are really positive on the implementation of this but also the benefits it will hold for the future. If you look in terms of front 2 on the left-hand side of the sheet, you can see what we have today and on the right-hand side where we would like to move to. In terms of technology, we want to shift away from our in-house developed loan system to the packaged core banking system. So it's a replacement in the end once it's implemented in all markets. And then we want to add the digital financial services app and the supplier marketplace system. Then in terms of channel, you see the branch in today's channel, but that will be kept in the future channel added by the 2 apps as just explained. And on the services side, we do offer loans and deposits today and we would like to extend that with other products and services. So a whole suite, including accounts, deposit, savings, payment, supplier marketplace. And then on the internal processes, today, the processes are manual, complex. Sometimes there are duplications in the steps, and we wish to go to digital simplified world with straight-through processing. I'd like to hand back to Dirk.

Thank you, Karin. I just want to confirm this is actually has been already announced in RNS in February, 24th of February to be exact. This is about the CEO succession, which will become effective as of 15th of June 2023. I've been running the business essentially since 2004, but in fact, I've also been working on the development of ASA International already since 2005, which means that I've been running this for about more than 18 years. And I think it's a good time in many ways for me to step aside and let a new person run the business going forward with a lot of new energy and a lot of new ideas. So we selected Karin Kersten to succeed me. Karin has been with us already for 1.5 years. We specifically actually recruited her with the idea that she would ultimately be succeeding me. And we are very confident that she will do an excellent job in running the company going forward. So the Board has approved the specific succession plan. I will stay as CEO until the AGM, which takes place on the 15th of June this year, after which Karin will become the current Executive Director of Corporate Development, but also she will -- as current Executive Director, she will be appointed as the CEO of the company. Just to give you a little bit of background, Karin, joined ASA International from ABN AMRO Bank, where she worked since October 2021 and became Executive Director in April 2022. And in the Board's view, including my own view, she is very well qualified to lead the company going forward. At the same AGM, I will step into a new role. I will not disappear completely. I will stay and be appointed as Deputy Chairman of the Board of ASA International and a special adviser to the new CEO and the executive committee and the broader management team in order to smoothen the path of transition and support a new leadership going forward. So I would -- I expect to spend still quite a bit of time, but how long that will be, will the Board ultimately has to decide. Then finally, just to summary and outlook. I will discuss through the company's operational financial performance continue to improve with OLP growth and high portfolio quality in most markets, leading to a profit before tax increasing to $46.3 million. If you compare that to -- you can compare that to $25.7 million in fiscal year 2021. So that shows that we've seen strong portfolio growth as well as [indiscernible] of profits in some -- in many of our major markets. The improvement was led by strong operational financial performance, as mentioned, in Pakistan, the Philippines, Ghana and Tanzania, which MFIs delivered strong OLP growth and increased profitability in constant currency terms. In U.S. dollar terms, the contribution was somewhat tempered by the significant currency depreciation some -- in these markets. And these markets specifically, we have seen substantial currency depreciation in Ghana and as well as Pakistan. So there has been a negative benefit from in terms of profitability. On the other hand, many of the other institution of our subsidiaries have done remarkably well, which led to this high level of profitability. The company significantly reduced our ECL, our expected credit losses, which we are charged into the income statement, which have come down all the way from $37.5 million to $0.6 million. So that has been a very strong performance, and that essentially means that many parts of our businesses are starting to motor along quite well again. The reserves for expected credit loss of the OLP in the balance sheet, including the off-book BC portfolio interest receivable reduced from $27.5 million to $16.9 million. So that obviously correlates to the profitability of a pretax level. Outlook for 2023, whilst inflation and the related foreign exchange movements affecting the group's operating subsidiary financial performance in U.S. dollar terms. The company expects the operating environment for its clients to continue to improve in most operating -- in most markets. So we feel quite confident that the business environment is truly improved and that we will be able to continue to grow in 2023. As most of the operating subsidiaries returning to growth and increased profitability and subject to improved performance in India and reduced currency devaluation, the company is confident of continued progress during 2023. So I think one of the things we point out here that depends a little bit on the development in India and also the currency devaluation going forward. Now we believe that the India situation has truly improved and it's also, we -- over the last year, we really downsized the business substantially, which also means that the exposure to India has substantially reduced. The currency devaluation continues in some -- potentially continues in some major markets. We do not necessarily believe that the devaluation of particularly the Ghanaian cedi as well as the Pakistani rupee have bottomed out. But we still have -- we really have to see how that's further going to develop over -- during the course of this year. Collection efficiency increased or remained stable during Q1 2023 in all countries, except Nigeria, which was affected by the elections and the demonetization of the currency in Nigeria. So that has some real impact, but we expect that, it will during the course of the year that situation will not only normalize but also improve to the levels where it was before. Finally, with regard to dividend, it's an important point. We decided after careful consideration to not declare a dividend in 2023 for the 2022 results. So we are not planning to basically declare dividends this year, most likely that would have taken place actually by June this year. But we would like to resume our dividend policy back to pre-COVID in 2023 of '24 -- for the year 2024 with the result in 2023, assuming improved operational and financial performance and normal dividend flows from the subsidiaries. And we're relatively confident that those operational and financial performance as well as the normal dividend flows from the past will continue to stay in place. So I would like to close this meeting unless there's any specific questions.

Yes, Dirk. We received a couple of questions. Thank you very much for those. So we'll go through those one by one. The first one is one about our business process. A very essential one is on how the loan application works within ASA International?

Yes. So how to become a client. Well, first of all, we have a very targeted client group in the 13 markets in which we operate, and we do have a very close vicinity model. So if you would like to apply for a loan, then you go to a nearby branch in 1 of our 13 operating countries. And then the intake process will start. We -- if you look to our client base, then 96.2% of our clients is female entrepreneur and it's important that you have a business and income-generating activities. We don't ask any collateral, but the business needs to be income generating and the loan application goes really local in the branch. So that's how our loan application works.

Thank you, Karin. The next question is on the OLP development. Specifically for India and Sri Lanka in the rest of this year, but also for the whole group and maybe a division there, how you look at it in constant currency and in U.S. dollar terms?

Yes, I can make a couple of comments. I mean, obviously, we are doing it in U.S. dollar terms, we've seen basically flat OLP $45 million to $44 million from December 22 to March 23, which is somewhat stable at this point in time. We envisage that it might shrink a little more with some transfer of some of the portfolio to the BC portfolio potentially. In terms of -- if you look at [indiscernible] the other country was?

So specifically for India and Sri Lanka?

Okay. Sri Lanka. Yes, Sri Lanka, I would say it stays fairly flat. I mean, situation has stabilized, but it's -- we are still waiting to see when the IMF -- the IMF support for the country will come in place. I mean the country has actually been able to secure quite a bit of funding from India as well as effects by -- also from -- let me say, from Bangladesh. So those 2 countries have supported it and that the IMF will actually come in place. We expect the situation in Sri Lanka to gradually improve. However, that will not mean that our business will suddenly increase in size very rapidly. But we hope to gradually rebuild it based on the current number of clients we have as well as the size of the loan portfolio.

And on India?

Now on India, so what is important in India, so you see throughout our publications that we had a deliberate shrinking strategy there. And you could see that on the slide with Dirk presented with the pattern over the past year. So you can see that India shrunk in constant currency because the column on the sheet shown is the constant currency change of the loan portfolio. So you see that India shrunk by 59%. And what we aim to do is to be less dependent on India in terms of concentration risk. And then -- so you do see that we will rely on these business correspondence partners. We today have 2 partners, and we aim to further extend that this year so that the concentration risk is not large. Of course, our next aim also, if we generate a little profit in India, that if we disburse new loans, then the interest rates and the margin cap are being released, so we can see what the profitability of India is.

Okay. Thank you, Karin. What's your view on the NIM development? Your outlook statement already mentioned that funding costs should go up by 100 basis points but can the margin still grow in this environment?

Yes. I'll take that. NIM, yes, it is projected to grow because we are focusing more disbursements in countries like Ghana, Nigeria and Tanzania rather than India and what was the other?

And what is basically the impact of the funding costs, which do go up and how does that relate to basically compared to the yields and therefore the NIM?

Yes. We do expect cost of funding to go up in 2023 as most of the benchmark grades have gone up, but that should be balanced with our increase in NIM.

Thank you, Tanwir. I guess this is another question for you on the tax rate. If we can give some guidance for the expected tax rate for '23? And is there any risk we could see another DTA write-down in '23?

I wouldn't say so because we have reversed majority of our DTA this year. That's why that number is huge. And for it to come back into our balance sheet, we do have to look at the IFRS guidelines and project a comfortable profitability in India, Myanmar and Sri Lanka.

Yes. Thanks, Tanwir. There was another question on the DTA, and that basically in the notes of the financial statement, 11.4, you can see that part of the DTA release relates to the ECL reserve, which is the timing difference. And is there a relation there with the still expected payment from the Assam government because writing down and still expecting payments to cover that overdue loans from clients?

Yes. That payment expectation is still there. And it will have an impact on the ECL number because the recovery always reduces the ECL. And again, ECL, the provisioning is part of the deferred tax component with the past losses. So yes, that will play an integral role into that number.

I think the summary is that we are extra careful and cautious there in recognizing both DTAs and also debt receivable.

Right.

Then a final question on the DTA is why not recognizing the DTA while these businesses are still ongoing?

Well, we -- I mean, why we are not recognizing? Well, we derecognized because yes -- because we are being less -- we're being precautious about the whole thing.

And this is basically following the IFRS guidelines for recognizing these DTAs.

But there shouldn't be any major surprises in the coming year and that's important.

Then there is a question on the FX hedging policy. Can you remind us on that policy and how the funding mix is between local and foreign currency loans.

Yes, it is our policy to hedge all of our loans. We might have missed or couldn't get the hedging for 2% to 3% of our total loan portfolio. And the second part?

The second part is the mix between local foreign currency loans and the FX hedging policy.

The mix is around -- it keeps changing. But I would say, 60-40.

Okay. Then there's a question about Nigeria...

60% local. So we try to get as much local loans as possible. So that hedging extra cost does not bear.

Because the local loans are in local currencies, and we have expenses in local currency and income in local currency. And so that it matched. And with international loans, if they are in dollars, then they need to be hedged. And the equity locally is not hedged for the dividend payments.

Yes, not yet, but we are looking into it.

Exactly.

Okay. I think that's a good explanation. Then on the old bank notes in Nigeria. Now they are still being accepted, why hasn't the situation improved already, which shows in the business update of March.

Initially, the time frame in which the old bank notes could be handed into new bank note was extremely short. And so that led to some turmoil. But now the period has been extended. So in that sense, the heat is out of that market, and there's more time to have an orderly conversion from the old bank notes to the new bank notes.

I would say it's probably still -- we could expect to see still some difficulty for some of our clients to potentially repay all their loans because of the long delays they've had and be able to run their businesses. So that potentially has some impact still. But we would expect that, that will gradually during the course of the year improve, particularly keeping in mind that the first quarter of the year in Nigeria is normally quite a quiet quarter.

Okay. Then there is a question about the pre-COVID dividend policy. Can you remind me what that policy was. And so what can we expect on dividend if the '23 earnings will all go well?

So the dividend pay policy has been 30% of profit. So that is still our policy.

Yes, that hasn't changed.

No.

Thank you. And yes, basically, there was a follow-up question on the tax rate for '23. I think there is a request to get a more specific guidance on the tax rate which we normally don't give. But maybe you can give some color. Will it be even higher than it is now? Or will it be lower? Tanwir, can you give some comment on that?

Yes. I would expect it to be lower within 30% to 40%.

Okay. Thank you. That concludes all the questions we had. Thank you for posting all your questions, and thank you for listening to this audio webcast.

Thank you.

Thank you.