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

Good morning, good afternoon or good evening, dear investors, lenders, potential investors, raters and all interested parties to ASA International. Warm welcome to our webcast on the H1 results presentation for 2023, and we're happy to take you along our results as well as to the outlook. I'm here in London in the room with Tanwir Rahman, our CFO; with Mischa Assink, our Chief Investor Relations and also Chief Accountant. And we're happy to go through the presentation with the results. Also on our webcast, you will find our press release as well as business update, and the presentation given will also be shared there. Starting on the highlights of the performance. We can summarize that the operational performance has improved, and at the same time, we face disappointing financial performance due to external factors mainly. If you look to the number of clients then, as you know, we do have a deliberate shrinking strategy in India, and that's mostly why the total number of clients went down in combination with the impact of Nigeria, where there were elections and demonetization. The number of branches is growing slightly. And if you look to our pretax profit, it's $13.8 million and net profit being $3.7 million. The OLP growth has been very good in Pakistan, Philippines, Ghana and Tanzania, especially in local currency, where if you look to the local currency OLP growth, our portfolio grew with plus 6%. So here are the dollar numbers, and they are being tempered by currency depreciation. If you look to the PAR, it has improved to the end of 2022. And our current PAR>30 show portfolio at risk, overdue payments more than 30 days amounts to 3.8%. Our ECL expenses have gone down significantly since COVID and now are $2.8 million, with the majority taken for India. The unrestricted cash balance is $45 million, which is we have a sufficient cash position there. It has been lowered since earlier levels. That's mainly because of paying off some debt in India whilst we were shrinking there. If you look to the key performance indicators operationally, you can see the number of clients already commented on. If you look to the OLP per client, you can see that in dollars, it stays quite stable. But with the devaluation of the dollar, you can see that it's in constant currency, which you can see on the last column, it's growing with 8%. The PAR levels have decreased. And if you look to our returns on assets and equity, you can see that it's lower and that the first half year profits are also lower, also because of higher incidental tax rates. If you look to the geographies, then we earlier announced shift that we could see South Asia shrinking and East Africa growing. You can still see this pattern continuing in the first half of the year. And so our portfolios and these are in dollar rates are shrinking in Pakistan and South Asia. And you can see that East Africa is growing, with Tanzania now being a very significant portfolio of $56 million OLP at the end of the half year. Now I'll hand over to Tanwir, our CFO, on some of the financials, and I'll come back later.

Thank you, Karin. So we just concluded our half year review by U.K., where we landed at is a PBT of $13.8 million and a net profit of $3.7 million. We see a big gap there, and that is mainly due to the deferred tax assets that we couldn't avail in India, the PLC and the NV. Also, as Karin mentioned, the lower profit can be attributable to devaluation, ECL and the supertax in Pakistan. On the OLP side, there's constant currency growth. On the equity side, we see the FX impact something that is beyond our control. If we look at our yield and margin and cost of funding, good improvements there, all positive. And the reason can be attributable to more disbursements and higher-yielding countries and also the fact that in some of our jurisdictions, the rate caps were lifted. Cost of funds remains broadly stable. And it is expected to grow up, but that should have a marginal impact for us because we are going to cover that with increased interest rates in some of our jurisdictions. Next slide, you can see our funding profile mix. As you can see on the left-hand side, that's our mix. And yes, it continues to be a mixture of equity, micro finance loan funds, local deposits, loans from development banks and like DFC and commercial institutions. So this period, we raised $75 million in fresh debt, cash unrestricted, $45 million in the balance sheet. Strong funding pipeline with close to $181 million fresh loans. We do see a downtrend in deposits and equity. And as mentioned earlier, it's mostly due to the devaluation. We did have some covenants that were breached in this period. So in total, we had $55 million of debt that had problems. But eventually, we received waivers for $36 million. Funders and lenders have been very cooperative and is with us into the future. With that, I'll pass it to Karin again.

Thanks, Tanwir. And let's have a look from H1 figures to the business update of August, so the most recent figures. And if you look to our loan portfolio, first, a word on the distribution. So whereas India was the #1 and largest country at one point, now you can see that others have grown while India have shrunk. So Pakistan is a large contributor to our OLP and income. And Tanzania has grown to a portfolio of $57 million in OLP per August. And also the Philippines and Ghana are large contributors. Where you see India mentioned and the word total, it refers to the total portfolio but the majority of this is our business correspondent portfolio where others provide the capital and also there is a maximum cap on the risk there. So our own book is much smaller than the number annotated on this page. If you look to the PAR>30, then after June, you can see it further go down, and not only the PAR>30, but also the PAR>30 less the PAR>180, which now shrunk from 1.7% at the end of half year to 1.3% at the end of August. If you look to our collection efficiencies, then you can see that they are very high at the end of August, that there is only 1 outlier not starting with a 9 or a 10, which is India. And here, again, the number refers to the total book. And so a large part of it, the risk is with BC Partners after cap. If you look to the other rates, you can see that they are very high, and also Nigeria is a special mention as the year has started there with a lot of problems regarding the election, the demonetization, the very high fuel cost and the unprecedented high FX valuation. But if you look at the numbers here in collection efficiency, it has grown from 78% in March to 95% at the end of August. So we're very happy with that improvement. Then on the regulatory side, and this is an important one as we are moving from being a microfinance institution to microfinance banking in several of our markets. This relates to our wish to have a more enhanced product suite to our clients, not only loans, but also payments, deposits, savings and other value-added services. If we look to Pakistan, then we have received the microfinance banking license. And at the moment, we are waiting for the certificate of commencement to be able to literally in our branches receive deposits and money from the clients. We have declared a dividend on the '22 results, and this has been applied to the Central Bank, the State Bank of Pakistan and approval is pending there. Then if we go to Ghana, we have received an approval for the application of our digital financial services. And that's very important in our route to digitalization. The dividend declared was also improved, and it has been partly paid in the meantime. In Nigeria, also the Central Bank has approved the dividend over 2021. And we now were able to also get not only the dividend approved, but also part of the payment has been paid and transferred. Now the dollar market has improved there in terms of there is a market to convert local currency to dollar and then to upstream it from the country to the group. Then to Kenya, there, the Digital Credit Providers Act took effect, and that had some impact on us because we could not take deposits from our clients. We do have the ambition to be licensed there. So this is an intermediate phase. And so this will lead to having more loans in Kenya for the time being. So that's why if you look to the financing costs in Kenya, they have gone up a little. That will be offset once we have the licenses. And regarding our digital route, we have also prioritized Tanzania and Kenya as key markets where we want to implement our core banking system and digital services first after the launch of Pakistan and Ghana. If you look to our strategy, then we want to gain sustainable growth and increased financial inclusion by our growing loan portfolio. The increasing financial inclusion has been our strategy for a long time, and we've added 2 layers, of which the first 1 is the digital channel, adding to our branch model, so not replacing but adding. And not only digital offering to the clients, but also using this as a digital internal processes so that we can reduce the manual work. The third layer in the strategy is to broaden products and services. So to go beyond loans, offer the loans online, then payments deposits and value-added services. If you look to the technology, we are now well underway in launching in the coming months, the core banking system; the package system in Pakistan; and then soon after that, in Ghana and release the digital financial services; also the supplier marketplace, which already is being launched in Ghana, and we have 1,000-plus clients that have downloaded our app. On the client channel side, you see the branch on the left and the right. And so we do not aim to stop working from branches. Our view is that the close vicinity to the client is really key to the ASA model, and we want to keep that. We will add the digital app and the SMP app and keep the branches as well. In the product suite, already alluded on, so beyond loans and the internal processes, we aim to make them from manual to digital from complex to simplified and from here, and they are duplicated to straight through processing. Then an important sheet on the redesign of the group meeting. The group meeting is very important to us. And you can see at the bottom of the slide that the purpose for the group meeting for ASA is that it has social and financial benefits. It's mitigating credit risk because we can learn from the group what the developments in the markets are, how our female entrepreneurs are, how they are doing. And it helps us also in the KYC. And also, we can seek opportunities for growth by being so close to the clients. Well, some of the questions we get and also raise ourself is, how will the future look vis-a-vis the client group meeting? And if you look to this slide, you see that the analog financial transactions will, over time, disappear. Because if the money is distributed in a digital way, then clients have won't need to come to us or to our brands to receive their loan nor they need to go to the group for handing in their installment. However, the financial inclusion and education will still be a reason for clients to have added value from the group. Also, the social inclusion plays a big role, and the digital inclusion and the learning will be added because they are eager to learn how digital finance works. On the picture of the page on the left-hand side, you see the traditional picture with the traditional client passbook and the traditional written loans and physical money. And on the right-hand side, you can see pictures from Ghana, where one of our loan officers is explaining about the digital app. And on the picture below, you can see a lady who has 3 phones in her hand. Those are client phones. We do see the mobile phone penetration growing in the client groups. And she is uploading here the supplier marketplace app on the phones of the clients. Also, if you look at this digitalization, not all clients will go digital at once. Some don't have smartphones or some are eager to wait a little bit and see how the experience is. Also clients can go partially digital. So we are more eager to distribute the loans digitally. And in the start, still have physical money in the payment to still have this must-go reason to the group. Also disbursement has larger financial risk for our clients to walk on the streets for the big pile of money. So that's partially digital. Also, the frequency of the meetings can change. And so if you have less meetings but still have these meetings, the benefits and the purpose for the group meetings can still be relevant whilst the frequency can go down. Well, we are taking substantial strides in implementing the digital strategy. And so as I already indicated, we are about to launch the CBS in Pakistan. It's been a whole process, but it's going well, and we are going to launch it soon. After that, directly, we go for the implementation in Ghana, where we are running a parallel but simply cannot launch a system in 2 markets at the same time. So Ghana will follow very soon. And then with CBS, Ghana is the first market where the digital loans will be launched. The SMP app already is launched, and 1,000-plus clients have the app. And now it's about conversion from having the app to orders and repeat orders. Well, that brings us to the summary. So if you look to our operational performance in the first half of the year, you see that we are growing in constant currency terms in the OLP with plus 6% in the first half year compared to end of last year. If you look to dollar terms, we do see a decrease and mainly because of some external headwinds, and we do see our net profit amounting to $3.7 million. There is some lower recovery than expected of overdue loans in India. There is higher ECL expenses. The main reason is the FX headwinds. And well, Nigeria heads that table with a devaluation of 70%, and then Pakistan went down with 27%. That's unprecedented since inception. Then there is a provision of $1.4 million for an additional supertax. So in Pakistan, the government raised a supertax. They announced that this year, and it was effective retrospectively since 1st January '22. So that was incidental and unexpected, but really hitting the net profit. Pakistan, Philippines, Ghana and Tanzania made positive contributions to our net profitability. And as already indicated, devaluation of the operating currencies made a big part. So that will land in the exchange translation loss. So that needs to be booked off our equity, and we want to note as well that we still have a sufficient capital base. So although there was a big write-off of the equity, we still sufficiently capitalized. Well, regarding the outlook, so on the one hand, we are positive and seeing improvements in the operating markets and continue to see them for the remainder of the year. And so to that extent, we are positive in the outlook in terms of quality portfolio, but also in OLP terms and growth in constant currencies. However, we had big setbacks in the first half of 2023. And so that's why we restate our expectation for the outlook for the whole year that our net profit will be lower this year compared to 2022. So the reasons related to demonetization and further inflation, unprecedented high, the developments in Nigeria and also to incidental tax claims. What that means to our dividend is that although the Board has planned to return to its pre-COVID dividend policy, we now have to say, given the tough market circumstances, that we believe that it's prudent at the moment not to commit to a dividend payment. So this brings me to the end of the presentation for investors or potential investors. We also want to announce that we will be in Scotland next week at the 28th of September. We will be present at the EFG conference, and we also will be in New York in 3 and 4 October. So if any of you are interested also in a follow-up meeting or a one-on-one meeting, please reach out to Mischa Assink, our Head of Investor Relations. And I'm also happy to hand over to him for any further questions.

Yes. Thank you, Karin. I will now discuss the questions raised on the webcast. I'll combine similar questions on the same topics. And to start with, there was a question if there is a recording because some people had difficulties on getting the sound. Indeed, there will be a replay on our website and also a transcript. After the meeting, the transcript will take maybe 1 or 2 days. So then the webcast can be replayed. And the next question is if the loan rates to the clients are already updated to the new interest rate environment, and what about for lifting the rate caps in India and Sri Lanka?

Yes. So we did go through that situation. What is the exact question?

So did client rates increase because of increase in lending rates?

Clients rates. I wouldn't say so, but yes, obviously, there has been an uptick, and that contributes to the margin. The thing is on India, the disbursement is low. So that has an effect. And that coincides directly with the client numbers.

And to add to that, so on the page that was shown on the yields, you can see our cost of funding being stable. Well, the tenure of our loans, so from our lenders, it's longer than the tenure of the loans we hand out to our clients. So what we do see is that the inflation and the interest rises by, not only ECB but in a lot of markets by the inflation is reflecting in higher current rates. We don't see that in our cost of fund yet. And we do see in some markets that -- so for example, India, indeed has -- so the caps have been lifted. But there, the volumes are very small, so you can't see that yet. We do expect that if our cost of fund also will raise, and we will price at market-conform rates that in the future, some of the rates might go up and the yields will stay stable then.

Yes. Thank you. Then there was a question to repeat the figures on covenant breaches and received waivers, and we can guide to Slide 9 of the presentation that mentions $55 million of breaches, of which $36 million wafers were received. And the follow-up question on that was what was the reason for the breach? And if you expect further breaches?

Yes. So the main reason for the breaches surrounds India. We do have PAR>30 breach there. So that accounts for the majority. And also the fact that this is for the going-concern period, which is a pretty longer time frame, so lenders usually give us waivers for 6 months that do not cover the entire period per se. And that also accounts for most of the breaches.

Okay. Thank you, Tanwir. And we also have a couple of questions on the effective tax rate. I heard the tax rate is quite high at the moment. The question is what will be the outlook for the tax rate on a normalized basis. And what would be a long-term steady state for the tax rate over the long term? And also a follow-up question on that is what will be the drivers to get that tax rate lower?

Yes. So as I mentioned earlier, there are certain countries, for example, India and some of our holding companies like NV and the PLC, these entities and holding companies do not foresee profit in the future. So that bars us from booking deferred tax asset. So that is the main reason for this effective tax rate to be high. Coupled with that, we have the supertax and the Tanzania Thin Capitalization. So that's the reason. And again, we don't foresee that going away in the near future, but eventually. And some of the things we can do in order to reduce it is transfer pricing. We're working hard to get it started in Ghana, Nigeria, Pakistan and India. Once those are in effect, we'll see a reduction. Also our DFS investments, if these are passed into the countries, we'll also see a reduction in the rate.

Okay. Thank you. Then the next question is what type of constant currency OLP growth do you expect for the second half and medium term?

Yes, that's a good question on growth. And as you know, we are in markets where now and then, there is a distortion, whether it be economically or by government or politically. So that's very difficult to say. But if any, what we saw when we were listed, we positioned as a growth stock with double-digit growth. And what we are aiming for at the moment is to have a well-balanced portfolio and to deliver sustainable returns. So that's also why we look at concentration risk and have added a concentration risk policy, not to have any country too large, but also, we're looking to capital allocation and allocation to where do we want to provide our money or grow in terms of how attractive the outlook in a country is. Then we're looking at yields. We're looking at margins. We're looking at size of clients. We're looking at the digital stage but also at the ability to stream up dividends. So we want to continue looking at that and to have healthy growth in constant currency, but also to be able to deliver an attractive results in dollars.

Okay. And next question is, since PAR>30 is improving, where would you expect provisioning to land for the full year? And are there any countries where you think any specific or incremental provisioning may be necessary?

Yes, that's a hard one to predict because these are assessed and judged at every balance sheet date. We do it on a monthly basis. But I would say India is a concern. So there might be -- based on what kind of write-off we do, there could be higher or lower provisioning there. Nigeria continues to be a country where it has to be assessed very precisely, and their quality is -- they're struggling. So there could be more provisioning there also.

Yes. So a good pointer for the provisions is looking at the PAR. And if you look at the PAR beyond half year, then the business update gives a good insight up to and including August. And there, you can see how the countries perform, and we see an upward trend in most of the markets. So the majority, better to say. And then especially in Nigeria, we do see an improvement on a PAR>30 and less PAR larger than 180.

Yes. I would also add that there's 2 components to that provisioning. One is in the income statement, the other, that leads to the reserve we build up in the balance sheet. So depending on which one you're looking at, I would suggest to look at the balance sheet one because the income statement one is a buildup.

Okay. And there are different questions on India and basically, if I combine those is what have you done in India? And what do you expect going forward?

Yes. So India, so if you read back on all our market publication, there was a lot of words of India in each of these. And you see less words of India now in the announcements. And the reason is that we have shrunk the business significantly. And the figures which are in now are also including the BC portfolio, and so we have derisked India. And also we do see that the marginal new loans or the loans that are handed out post-COVID, that they continue to make payments, and the clients continue to make payments on their loans due. So that's an improvement on the new loans handing out. One thing we know about India is that we do not want 1 single country to have such a big impact or negative impact on the total of the portfolio. And that's why we've introduced a concentration risk policy, but also decreased it and worked with BC Partners. Well, so going forward, that's what we know. So -- or it will contribute or at this shrinking strategy is at place. Well, you could raise a follow-up question, which is how could India then be capitalized? And we are grateful for the trust of the lenders and also the improvement, which is now shown also in the recent new loans and after the restructuring there. So yes, that will -- that is to be seen how we go forward, but we want to go forward in a healthy way.

Okay. Next question is, do you feel that you are correctly capitalized as a company? And is there a risk of dilution?

A risk of dilution in what sense, I would say. But if you look to the capitalized, so then -- well, there are 2 components which help. So the short answer is, yes, we are sufficiently capitalized, and we do have enough equity for our balance sheet. And so we are in a good shape in the level of equity. Well, there are a few things that move equity. One of them is FX movements. And if we have unfavorable FX movements, it will have an impact on our FX translation reserve and eat in our equity. And the other element that will -- plus the equity is, of course, making profits and adding it to the equity. If we look at the FX risk, then our loans are in local currencies and our costs are in local currencies in the country. So there is no FX risk in there. And if the loans are in dollars, they are hedged. And so also there, the risk is mitigated. We have added an equity-hedging policy. And so we are closely following what the FX forward rates are and what an FX hedge would cost. And at certain circumstances, we could and would and will hedge the equity. Another measure to mitigate the FX and the vulnerability to FX losses is to declare the dividends or upstream the dividends from the countries to the group as well as looking to interim dividends being paid because then, it wouldn't be in the local currency in the country and evaporating. So we are very closely monitoring and steering that, and we do see positive developments during the year of upstreaming dividends.

Okay. Can you give more clarity on your net profit guidance for the full year?

Yes, that's a very valid question. And the answer is simple that we have quoted that our profit will be lower, and we are not giving any further objective to that to make that more precise. And the reasons are given in the outlook, and that is that we do see that FX movement and incidental taxes are really having a volatile impact. And so our indication is, and will be, that the net profit will be lower.

Okay. Then we go to the last question currently. If there are still any questions, please feel free to add them. But for now, this is the last one. What are the benefits of the digital channel for clients and for the company?

Yes. That's -- so first and foremost, it's to improve our client offering because if clients could do their financial services in a digital way, for example, the distribution of the loan is not only safer, so not to walk on the street with a big pile of money but it's also much more efficient. Today, clients go to a branch, sometimes have to walk 2 hours to a branch, wait for a few hours for the whole due diligence process, and then they go home with their loans. So it's much easier for a client to get the loan requested online and then have it distributed online. So we do think it's very important to keep a good -- or to improve the client proposition that a digital offering will help there. We also do see benefits to ASA. If you see how the client processes go at the moment, then a loan officer goes to client meetings in the morning. But in the afternoon, a lot of time is spent on counting the money, reconciling the money, filling in forms, refilling in forms, filling in other forms, then entering it in a computer. And so a lot of time is spent on internal processes. Well, if we have our digital app, then the client flow and the loan officer app is both in this digital offering. And so a loan officer could spend also the afternoon's time on client meetings or going to clients' houses for collecting overdue loans. Also in a digital situation, the client meetings might take place less frequent, meaning that we could even further optimize the efficiency in a network and have much higher client loadings with the same number of loan officers. So we do foresee benefits both on the client side as well as on our own operations efficiency.

Thank you, Karin. There was one new question, I think from your outlook explanation, which is, are you confident that '23 will be profitable after tax? Or might it be a loss?

No. The lower wasn't having a negative connotation to us.

Okay. So this was the last question. So back to you, Karin, for a closing remark.

Well, I just wanted to say to you, looking back at this review, but also the August business update, that our operations have shown an improvement in local currency, and we do have a good contribution from a large number of countries; that also the financial performance has been disappointing, mainly because of external factors relating to incidental tax, lower-than-expected ECL and especially the devaluation of the currency. Having said that, we are making big steps in our digital offering, and we do have confidence in the further growth of our operational business. And yes, we are looking ahead with confidence, and we also would like to thank you for your trust and time taken for this audio webcast to all of the investors, lenders, potential investors, raters and all interested parties. Thank you very much and have a nice day.