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

Good afternoon, and welcome to the ASA International Group PLC Investor Presentation. [Operator Instructions]. I'd now like to hand you over to Karin Kersten, CEO. Good afternoon to you.

Thank you, [ Alexandra ] and my name is Karin Kersten. I'm the CEO of ASA International, and warm welcome to you, investors or potential investors for ASA International or other interested parties. We would like to take you through a short introduction to our company and then to the results of 2023 and the first part of 2024. So if you look to ASA International, we are one of the world's largest international stock-listed microfinance institutions, and we provide financial services to low-income female entrepreneurs in Asia and Africa. Our vision is to contribute to just and financially inclusive societies. Our purpose is like BSG United Nations Goal #1, to reduce poverty. And we want to enable female and power to female entrepreneurs, and we want to enhance our social as well as our economic position, our clients are typically low income and we want to increase financial inclusion. Our company values are professionalism, integrity and teamwork. Teamwork not only applies to teamwork across colleagues, but also of colleagues with our clients. Our clients who come together in the so-called client groups and client group meetings typically have the role of client Chairman, Treasurer and Secretary. And our clients help us with maintaining a very high quality of our loan book. If you look to ASA International at a glance, we are operating in handing out loans in 13 countries in Asia and Africa. That helps us in a well-diversified portfolio because in emerging markets, that might be political or climate risk and by being in so many countries, we can diversify. One of our characteristics is that we are deeply rooted in the communities with over 2,000 branches. Our employees will amount to 15,500 nearly, they are mostly in the role of loan officer. There are only less than 150 staff centrally working at the headquarters in Amsterdam and Dhaka Bangladesh and all the others are in the field or in the headquarters of the operating entities and mainly serving our clients. We do serve 2.3 million clients and most of them are female clients. Our outstanding loan portfolio is $370 million with an average outstanding loan of only $160 per client on average. The par, which is a metric, which indicates the quality of the loan book, measures portfolio at risk, and that's the percentage of clients who are overdue on a payment of more than 30 days, and our par ratio is very low with 2.1% and a high quality of the loan book. That brings us to where we operate. And as already indicated, we are active in 13 countries across 4 regions. India and Bangladesh are the route of microfinance. In South Asia, we are present in Pakistan, India and Sri Lanka. We are shrinking a bit in India, and we do have a shrinking strategy there because of the market circumstances and the prior bad performance hit by COVID. If you look to Southeast Asia, we are present in Philippines and Myanmar, and Myanmar is doing remarkably well after several setbacks because of the worst situation there. And if you look to West and East Africa, East Africa is really promising market with Tanzania, Kenya, Uganda, Rwanda and Zambia with not only a growing portfolio, but also a high-quality portfolio. And then in West Africa, we're present in Nigeria, Ghana and Sierra Leone. Whereby Ghana is a key market for us where we are launching as the first market our digital financial services. If you look to these pictures, it indicates where we come from and where we are going to. On the left-hand chart, you see a typical client group meeting with clients sitting together, and they come mostly on a weekly basis and pay their weekly interest rates and pay back their installment. They do that with cash payments and they have a so-called loan booklet in which the loan is written down a savings part, if there's cash collateral, the payment of the installment and the interest and it's trading cash and clients come together and the processes are very much manual. We are migrating to mobile payments and digital financial services app in the future. Recently, when I was visiting Ghana, each time when I'm visiting an operating entity, I'm asking who has a phone, mobile phone, who has a smartphone, who would like to be paid out alone by a digital financial services mode and who would like to do a payment by a mobile phone and/or save money delivers. And in the last kind meeting in Ghana where I asked this, 100% of the women would raise their hand and say yes to all of this. So there was 100% smartphone penetration and clients really looking forward to the digital offering on top of the branch network and the face-to-face client meetings. Our client persona. So here, this is our typical client persona. It's a female in the age range of 18 to 65 years old. She has an income of around $3 to $4 a day, which is the World Bank definition of poverty or below poverty line. And our clients do get very small loans and have a now or hard access to formal credit services at a bank. They do have strong social ties in the local community, and they are entrepreneurs, and they need working capital to buy goods and sell goods and so they are in a cash-generating capacity. These women are predominantly urban, but also some semi-urban or rural and they are working in one form or another in an informal trade sector, services, trading, manufacturing, agriculture. And as you can see on the picture on the left-hand side, it's all a first life need. It can be a hair salon, a cloth repairing services or in food or groceries. And so those businesses are really resilient and priced in elastic. And so there always is demand for fruits and those kind of goods, which makes the businesses of our clients very resilient. We do have a scalable branch model. The branches are sold, they are really deeply rooted in the community. Each branch has a radius of around 12 kilometers. There is 1 branch manager, 1 system branch managers and 4 loan offices who are out in the field. In the morning, they go to their clients for client group meetings. In the afternoon, they are working on the internal processes, but also visit clients for overdue loans and they do serve clients with a long tenure of around 6 to 12 months. The average loan disbursement is around $266. So the average outstanding, of course, is lower because they pay off the loan, so that's around $160. The average outstanding. They do have an income-generating purpose with their business. It's a very small business, and we will enhance their business activity. In one of my last client meetings, 1 client stood up, and she was a client group leader, and she spoke and said, "I'm really, really proud because I started the loan of GHS 50," which is the local currency in Ghana, and over time, she has grown with her loan from GHS 50 to GHS 20,000. And by growing her business, she increased her household income and she could save some money, whereby her children, apart from one, all could go to university. And by that, she helped social empowerment and well-being in the family. And then after paying off her loan, she could go into the next cycle of a larger loan. And that's where we both impact economic situation, the social position of our clients, but also are a healthy ROE levels for the business ourselves because our clients are really good in paying back their loans and in paying around. That brings us to some of the distinguishing features of the ASA model. On the top left, the group selection without joint liability, so in microfinance, sometimes they're a group liability. If one client doesn't pay, the others in the group are liable. We have a model with a single liability. So our clients are personally liable for their loan and that makes them really ambitious and wanting to pay back their own loans. On the other hand, we do have social collateral because in the group structure, if one client pays back her loan, the other doesn't want to be behind and also wants to pay back. I already indicated that our low ticket sizes are a key feature because via those really small and micro loans, we go step-by-step. The loan is paid off and then a new loan is granted. So that's some of the key characteristics of our business. That brings us to our financial performance of 2023. And the key point to mention is that the second half performance, both operationally and financially has improved compared to the first half year. If you look to our clients, 2.3 million, the percentage of client growth was 5% in the second half compared to the first half. If you look to our pretax profits, they amounted to 32.2 million. And in the first half, it only was 13.8 million. So it has accelerated. On the net profit, the same is applicable. The total net profit amounts to 8.8 million, while the first half only was 3.7 million and the hyperinflation effect has all been taken in the second half and not in the first half. So that indicates that there is an acceleration of operational performance. The OLP or Outstanding Loan Portfolio has grown in the second half with 35 million to 369.2 million. The par, so the portfolio at risk has decreased from nearly 6% at the end of '22 to 2%, 2.1% at the end of '23. Our reserves for credit losses also have decreased a lot from 70 million in 2022 to 8.3 in 2023. We do have sufficient cash with unrestricted cash position of 48 million. If you look to our key performance indicator, then our clients have grown by 5% in the second half year. The average growth of our loan portfolio per client also has grown 4% over the second half year. And if you look in constant currency over the whole year, the growth has been plus 16%. And please note that the dollar growth is having to absorb the devaluation of the coin. So growth in dollar indicates a higher growth in constant currency. The return on equity was 18.5% in '22 and in '23, 10.5%, and that would have been close to 18% if hyperinflation will be corrected for. Well, talking about hyperinflation, over the '23 results, it's the first time that we, as a company, had to apply hyperinflation accounting. That is applicable on entities which have a 3-year period inflation of more than 100%, and that's applicable to Ghana and Sierra Leone. Sierra Leone is a rather small entity for our company as a whole, but Ghana is a rather large operation. If you look at the impact of this, then it has a positive impulse on the equity of +0.6 million, and it has a decrease effect on, I would call the paper net profit of 5.4 million. So here, you can see the impact both on the balance sheet and the profit. And it has to be said that there is a communicating vessel between the profit and the translation loss reserve we had to make for the FX, which makes that for Ghana and Sierra Leone, we don't need to go down in equity for those reserves because of the hyperinflation is being corrected via the P&L. If you look to the current running year, Ghana and Sierra Leone are expected again to be in a hyper inflammatory year over the 3-year period and Pakistan and Ghana are on the watch list. We do have a well-diversified portfolio. And if you look to the growth of our portfolio in constant currency, you can see on the bottom right-hand side that East Africa has grown with +36% over the year in constant currency. East Africa really is a promising market, not only in terms of growth, also in terms of quality of the portfolio and also a positive outlook of smartphone penetration. And that's why we are intending to have our next market for launching our digital financial services in Tanzania and Kenya. You also can see that Nigeria has suffered not only in constant currency, but even more steeply in dollar terms. The devaluation of the local currency over the year has amounted to 100%. If you look to the largest countries, then in each region, our top 4 countries in each region, there's 1 market who is the top 4 of our largest countries in terms of OLP, which is Pakistan, Ghana, Philippines and Tanzania. These FX effects make that we are alerted on the holding entity, not only helping the operating entity, but that we really stimulate payments being made from the operating entity to the holding entity in terms of dividends, transfer pricing and interest and loan repayment. In the operating entities, the local currency predominates and by paying out those cash streams to the holding, we can convert from the soft local currency to the hard currency at the holding entity. So we are really encouraging the operating entities and also helping and to see if we can safeguard those dividend payments, interim dividend payments and transfer pricing. Some regulators, especially in Ghana, Nigeria, Pakistan, Myanmar and India require an approval not only of the transfer pricing in some markets, but also dividend and interim dividend payments here. I hand over to Tanwir.

Thank you, Karin. So this is our condensed income statement and balance sheet. We together with the Board did approve this yesterday. And we do get audited by EY UK and our report, these financials are coming out on the '26. So the message here is financial performance improved in H2 of 2023. And if we look at the income statement, we have a profit before tax of 32.2 million, which includes the hyperinflation effect of 5.4 million. From there, we have a net profit number of 8.8 million for fiscal year 2023. You do see a big gap between the PBT and the net profit and the reason can be attributable to certain one-off items that hit us in 2023. So at the nominal rate of tax expenses for the countries, that number should have been 12 million, but there are some one-off items that got added to that, which is part of that difference. What are some of those items? The most notable ones are. There is under-provisioning of super tax for Pakistan that we had to charge this year, which has a retroactive effect to the previous years. That's approximately $3 million. There are deferred tax benefits that we couldn't avail for India and some of our holding entities. And that's another $3 million. We did not get any credit for the hyperinflationary adjustment for approximately 1.3 million. And there were disallowable interest expense line items for Tanzania that we couldn't also avail. That's 1.5 million. So altogether, those make up the 20 million difference. And the good part is some of these would go away next year, namely the Pakistan and the Tanzania one. Going a little bit deeper into the balance sheet, and this will help you make better investment decisions in us. Oil peak grew by 5% and in constant currency terms, we saw an increase of 21%. The number there does include our off-balance sheet portfolio which is coming from India. That number is different in the actual balance sheet than what we are showing here. We have bond deposits, which took a [ debt ] when compared to last year. And the reason there is because of -- we have to return some of the savings in Kenya for regulatory purposes. Interest-bearing debt increased to $268 million. We did get 179 million of fresh debt in 2023. The total equity number, very important, most important, increased when compared to H1 2023, despite taking a hit of approximately $24 million from FX devaluation, we show a healthy 11% growth there. This slide shows what your money will get you basically a relationship between yield, cost of funding and margin. We ended the year with a yield of 39.1% with a cost of funding of 10.8%, our margin stood at a healthy 31%. We did disburse more on countries that have higher yields like some of the East African countries, and that contributes to the increased yields. There were upward adjustments of interest rates in India and Sri Lanka, coupled with the fact that there are no more rate caps, also contributes to the higher and healthy yield and margin. Our funding rates remained broadly stable compared to fiscal year 2022. Despite commercial rates going up, these benchmark rate increases in some of the markets were balanced by the improved pricing from local funders. International funders have been expensive, and we tend to focus on local funding, which is cheaper. A view of our funding profile. Here is a mix of how we fund the business. Basically, it's a mixture of equity, microfinance loan funds from lenders like BlueOrchard, Oikocredit, Symbiotics. We do focus on local deposits. That is a chief funding, a lot from development banks and foundations like DFC, OEB and BIO. They also partner with us. And then again, there are the commercial financial institutions. Again, we maintain a favorable maturity profile, where our asset side, our loans to the customers are shorter than the liabilities, which is the creditor standard and their loan terms. 179 million of fresh debt raised in 2023, unrestricted cash balance stood at 48 million at year-end. We do have a strong funding pipeline of approximately 171 million as of 31st March 2024. As at year-end, we did have some covenant breaches, but we work with our lenders, and we were able to receive waivers for all of them. So again, on this funding mix, our aim and goal are to focus on local deposits and transform some of our institutions into a regulatory environment. With that, I'll pass it to Karin again.

Thank you, Tanwir. Well, let's go from the financials in 2023 to how this year is going. So an update to March 2024. And we have 2 indicators, 2 lines here, a green and a blue line and the green line is a measure for growth. This measures the percentage of disbursement as a percentage of the collection. So everywhere where we are above 100%, it indicates that the portfolio is growing. In 10 out of our 13 markets, the percentage is above 100% and hence, the markets are growing. The blue line is an indicator of the quality of the portfolio. This so-called collection efficiency percentage is what we collect as a percentage of what we should collect from our clients. In 11 out of the 13 markets, we had a collection efficiency of between 97% and 100%. You also can see that our portfolio is growing even in dollar terms, although there are FX devaluation. So the current portfolio is at $380 million, which is 13% higher if you look for the like-for-like on March 2023. The blue line on the bottom is the indicator also for quality with a PAR>30 that was end of '22 was 6% and now amounts to 1.8%. So compared to end of the year, there's further improvement and the overall quality of the portfolio is 1.8% of the clients is more than 30 days behind on 1 or more payment installments. The performance-driven approach. So our vision and strategy, the vision, as explained, is to work on a just a financially inclusive society. And our strategy is to grow financial inclusion. We would like to add a digital channel and digitize our internal processes and also offer a digital, more product and services. To derive that, we want to drive performance, and we've changed the governance and structure and several committees by installing a small executive committee with each area is ultimately responsible across geographies. Also, several new committees are set up, for example, an asset and liability committee looking at concentration risk, how to hedge the FX currency also outmatch the assets and liability side of the balance sheet. Also, we have leadership team meetings to make sure that we have 2-way traffic to our key leaders in the organization. We're not only setting targets, but we are also measuring. And what we've changed is that in the past, the leaders got a target and they would do their best to deliver in local currency. At the moment, we are setting targets before the year-end starts, and our leaders are committing to dollar results. So there is a change in that. We define clear target performance indicators for each country. They range from outstanding loan portfolio, a number of clients served for loan officer, the quality of the portfolio, the margin, the cost-to-income ratio, and we measure that via the so-called Quarterly Business Performance Challenge Meetings and really look at the actual performance versus the committed targets. Another way to drive performance is that we look at leaders and role-modeling of leaders, and we are seeking new profiles along with the implementation of our new strategy that needs a digital channel, but also more products and services and so more enhanced risk models, more products. And so we're looking for some new leaders, but also in role-modeling and collaborating and sharing best practices. Our growth strategy is we would like to deliver a sustainable growth and to reduce poverty, we want to increase financial inclusion and hand out more loans, introduce new loan products, have more clients, more branches and also grow the voluntary savings by our clients. On top of that, we like to add a digital channel whilst maintaining the branch model and this proven credit methodology via the group meetings and field presence. The enhanced digital processes will enable our loan officers to serve more clients. [indiscernible], we want to offer digital products and services, so also online loans, online payments, online savings and value-added services by the so-called supplier marketplace. By this enhanced offering, we also hope to attract new clients. Today, we do have our own developed AMBS loan system. We have successfully migrated from this AMBS system in Pakistan to a new core banking system, a renowned terminal system, the financial inclusion food, and we are currently rolling about in Ghana. We are not rolling out only the core banking system in Ghana, but also digital financial services and the supplier marketplace. After Ghana, Tanzania and Kenya will follow and more markets out there. On the client setup channel side, we do have branches, and we want to keep that because that's one of the key characteristics of the ASA model. On top of that, we want to add to digital financial services and a supplier marketplace app. That brings us to an enriched product and service offering, not only long deposits, maybe cash collateral and savings, but also online loans, savings more from our borrowers also from the public payments and a supplier marketplace. In terms of internal processes, we want to migrate from manual and complex processes to digital and simplified processes, allowing our loan officers to serve more clients. That brings us to the summary and outlook. The 2023 financial performance was compared to the 22% lower, primarily because of financial FX movements, demonetization in Nigeria and the first time application of hyperinflation accounting to Ghana and Sierra Leone. Our results over the second year improved, and our constant currency loan portfolio grew by 21% in constant currency, and the number of clients grew by 5% over the second half year. Also, the quality of the loan portfolio grew. It was 6% par at the end of '22. And towards the end of '23, it was 2%. The key contributors in terms of size, but also quality is Pakistan, Philippines, Ghana and our East African market, Tanzania and Kenya. Regarding the outlook for '24, we remain positive. And so the second half is of '23 is more a marker for '24 than the whole year. So we expect improved business performance for our operations compared to '23 because of that stronger second half. Having said that, the inflation and FX movements, which are related to that, are expected to continue to impact the group. Also hyperinflation is expected to take its turn in '24. We expect Ghana and Sierra Leone to be under hyperinflation accounting for the running year. And Pakistan and Nigeria are on the watch list. All in all, we look back on a healthy performance in '23, mainly because of a good second half year and the first months of 2024 gives us a remaining positive outlook on improved business for the remainder of the year. I now hand back to Mischa.

Yes. Actually, back to [ Alexandra ] first, and then we'll go to questions, [ Alexandra ].

Perfect. [Operator Instructions]. As you can see, we have received questions perhaps today's presentation. Mischa, at this point, if I could just hand over to you to chair the Q&A, that would be great, and then I'll pick up for you at the end.

Indeed, we got a couple of good questions. Thank you very much for those. And the first one is how do you look to mitigate high inflation and currency depreciation?

So high inflation, yes, that is a challenge because high inflation and currency depreciation go hand in hand. We have a few measures. So first of all, the loans we do have in our local entities are hedged. So they are all in local currency or if they are in dollars, they are hedged. So our loan book there, so from our lenders is hedged. We have introduced an equity hedging policy. So we'll look carefully at what the FX forward rates are compared to the cost of hedging and then another very important measure was, as in the presentation, it's floating back up to the group, the income stream. So in terms of transfer pricing, dividends and interim dividends because by paying our dividend to the group, we transfer them from the soft currency in the entity to the hard currency at the group level, and we are really looking at taking all these measures as far as we can influence them.

Yes. Thank you, Karin. Then the second question is that when you consider the varied performance across different markets, can you elaborate on specific strategies that you employed in markets like Pakistan, Philippines, and Ghana that contributed to their excellent performance in terms of portfolio quality and growth?

Well, the word specific strategies, I would say we have a strategy of increasing financial inclusion, implementing the digital channel and then going to more products and services, Pakistan and Ghana are front runners because Pakistan is the first market where we introduced core banking system and Ghana is a market where we are now implementing this and it's the first market to implement digital financial performance. We chose those markets because they are large markets, high-quality earnings and especially for Ghana, having a good digital penetration.

The next question is it's a bit related, but still more focused on competitors. How do you plan to maintain your competitive edge in markets like India, Nigeria and Uganda where strong competitors already exist?

Yes, the competitive edge, the best question for that is asking clients. And while in a client group meeting, every time we ask, why do you choose for ASA? Many clients answer, "We like the pricing of ASA." There are also other non-regulated small players that might ask higher rates to clients. So they mentioned the pricing. They do mention that we are really present and go to the clients rather than the clients going to the financial institution. They like the professionalism and the service and the integrity of ASA. And also they are really enthusiastic about the upcoming digital financial services. So the answer is professionalism, integrity and teamwork being with the ASA model in the close vicinity of the clients with really motivated staff and then preparing for the future with our digital offering and offering more products and services. So that's how we look at, addressing competition.

Then the next question is, can you elaborate on the impact of the new core banking system and digital financial services platform on operational efficiency and customer engagement? And a second question there is what measurable benefits have been observed since the initial rollout in Pakistan?

Yes, it was a very good question. It would be too early to already look at the benefits because the migration of the core banking system just has happened in Pakistan. If you look at expected benefits, so in Ghana, that's a more important market because there, we will launch the digital financial services for the first time. And what we do expect is that by rolling this out, a loan officer can serve more clients because currently, a loan officer is going to client group in the morning and in the afternoon, spending time on internal processes. If the digital financial services at is there, it's not only the channel to the clients, it's also the channel, the loan officer uses for the internal processes. So by saving time, a loan officer can serve more clients over time. Also, we do expect benefits from having a more enriched client offering and with payments and savings that we have anchor products to really bond the clients to ASA. Other benefits are that if we get our savings from our clients and the public that our cost of funds will be more favorable and hence, our margin could increase.

Okay. Then we got another question. Also given the competitive dynamics in regions like the Philippines and Nigeria, how do you plan to differentiate your offerings to gain market share?

Yes, the differentiation really is the ASA model. So that is the close vicinity to the clients and keeping that and adding on top of that the digital financial services. So there are competitors who are only digital, and that's a different offering. There are also competitors like mobile phone who go in microcredits, nano credits, and it's a different form. There are also competitors who are really manual and don't have an ambition to go into digital. So for us, the differentiating factor is that the key elements we presented on the ASA model that we keep them and then on top of that, have a digital offering. So we go with the development in time and take and reap benefits from a digital offering, but also keep this high credit quality close to the facility of the client's local presence.

That was the last question. Thank you very much for your good questions, I would say. And we go back to [ Alexandra ].

And of course, the company can review all the questions submitted today and more published as responses on the Investor Meet Company platform. But just before redirecting investors, provide their feedback is particularly important to the company. Karin, could I just ask you for a few closing comments.

Yes. So in closing, so ASA International is one of the most largest international listed companies on micro finance and we differentiate ourselves by the ASA model, which offers micro credits to female entrepreneurs with a very high credit quality and a high collection efficiency. We want to cater for the future by offering digital financial services and going into more products and services to our clients. If you look to our performance, the 2023 results were at the second half was outstanding compared to the first half, and we do see that trend continuing in the first half of 2024. We have to deal with hyperinflation and hyperinflation accounting, which had a positive impact on our equity and a negative impact on our paper profit, but it didn't impact operational financial results in the entities. We are confident on the further continuation of this line in 2024 results in terms of operational performance. And yes, we do expect hyperinflation accounting to take back in 2024, also with FX devaluation, we are really filled about the DFS launch, the Digital Financial Services app in Ghana this year. And so we are really confident on further implementing this strategy of going digital and offering more products and services and also to drive performance via those new set of committees, measurements and role modeling.

Perfect. Karin, thank you very much and Tanwir and Mischa, thank you for updating investors today. Could I please ask investors not to close the session as you now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations. This don't take a few moments to complete, some will be correctly valued by the company. On behalf of the management team of the ASA International Group PLC. We'd like to thank you for attending today's presentation, and good afternoon to you all.