Mintos is introducing risk ratings for loan originators offering their loans on the Mintos marketplace. The Mintos Ratings are on a scale from “A+” to “D”, representing the lowest and the highest counterparty risk respectively. Keep reading for more details.
The Mintos Rating methodology is developed internally and has several similarities to the Fitch Ratings Global Non-Bank Financial Institutions Rating Criteria. The risk assessment of each loan originator is performed by our risk team. Please note, that the Fitch assigned ratings are in no circumstances directly comparable to the Mintos Ratings of the loan originators on the marketplace.
The rating is driven by five core factors characterising each loan originator: operating environment (10% factor weight), company profile (15%), management and strategy (15%), risk appetite (20%) and financial profile (40%). Additionally, a support factor is incorporated for loan originators who receive guarantees from the group or a related company.
The assessment of the quality of regulations for the relevant sector, the enforcement and potential impact of regulation in the foreseeable future. If any evidence exists that potential regulation amendments are underway, a higher risk is assigned. Effective regulatory institutions and law enforcement are viewed positively. Absence of relevant regulation is not necessarily a negative factor if the general business environment supports the effective function of the sector like, for instance, as is demonstrated by the small to medium enterprise (SME) lending sector in different geographies.
Considers the company’s market position, product offering and organisational characteristics.
- Franchise - assesses the market share and competitive position of the company's product offering. Loan originators relative size, market leadership and client retention are compared. Better positioning in the market is a driver for a higher rating.
- Business model - assessment of a company’s product offering and their generated income proportions. A wider product offering is associated with better diversification and lower risk.
- Organisational structure - the subfactor reviews the group structure complexity and intragroup transactions. Considerably complex structures mean multiple-layer holding companies that are not justifiable with the businesses scale and, as a result, it is hard to follow intragroup transactions leading to the downward adjustment of a rating.
- Underwriting standards - compares lending standards and procedures with those of the market practices. The approval rates, the credit criteria and their application during the credit process is assessed. If the company goes above the market risk-aversion, prudent provisioning and efficient collection process then it will result in a positive rating adjustment.
- Risk controls - application of internal or external risk controls, usage of credit bureaus in the underwriting process, procedures to prevent an external and internal fraud, application of automated processes and credit decision making are viewed as supportive factors for a higher rating.
- Growth - a rapid growth of the balance sheet represents the risk of a lowering credit quality and/or potential gaps in risk management or operational limitation. On the other hand, a constant growth level below the market indicate shows a weakening market position. In both scenarios Mintos would apply a negative rating adjustment.
- Market risk - the assessment considers the loan originator’s exposure to interest rate and foreign exchange risks. Typically, if a company has substantial financing in a different currency and with different maturity profiles than those for the assets, the rating would be negatively influenced.
- Asset quality - focuses on the loan portfolio metrics. Non-performing loan (delinquency) and impairment ratios are considered. Relative risk profiles of different loan products and operating environments (country) are incorporated. Vintage analysis of delinquencies and payback/payoff are used to track asset quality over time.
- Earning and profitability - assesses the earning quality (recurring vs non-recurring), stability over time. Return on assets and equity as well as net interest margin on the loan portfolio are indicators that are employed. Cost to income ratio is the measure to proxy for operational efficiency.
- Capitalisation and leverage - equity to debt is the core measure applied to assess the company’s ability to endure deterioration in asset quality.
- Funding, liquidity and coverage - funding source diversity in terms of type and investors, existence and quality of the contingency funding plans, funding maturity profile versus the maturity of the assets. The interest coverage ratio is used to proxy for liquidity and coverage headroom.
Management and Strategy
Includes the evaluation of the company’s governance, management experience, credibility and track record.
Corporate governance in terms of the effectiveness of the management team and business oversight. The budgeting quality and the reasonability of the assumptions are reviewed and impacts the rating.
Management experience is assessed in terms of relevance and years in the relevant sectors. Key level management credibility competence should match the business’ size and complexity. A high level of credibility with different stakeholders lifts the rating whereas a high turnover of the management team is viewed as a risk factor.
The track record and ability to execute the strategy and budget in previous periods adds to this assessment. A high-quality financial report, transparency and timeliness are incorporated in the rating as a supportive factor.
A review of loan origination standards, risk exposure and corresponding risk management practices.
Focuses on the loan portfolio quality, the company's financial standing and performance.
In the instance when the loan originator is part of a group (having sister companies in other geographies and/or a parent company) the Mintos Rating assignment accounts for a guarantee provided from the group. For instance, if a standalone assessment of a loan originator yields a Rating B- and it has received a guarantee from the group company or a group rated at A, Mintos would apply the risk transfer approach and rate the loan originator at A as well. In the absence of a legal commitment, the loan originator would be rated at a standalone Rating B-. This would be the approach despite the presence of high ability and/or probability of support being received.
In some cases, being a part of a group could put a constraint on the Mintos Rating for the loan originator, for example, in a situation when a loan originator is rated at A, but belongs to a group that is rated as B-, loan originator will be rated as B- as well. By assessing the potential of a negative impact from the group, the loan originator might be assigned a lower rating than its standalone measurement.
What data is used?
The Mintos Rating is based on information obtained during the initial due diligence process and data from ongoing monitoring. This includes the primary information from loan originators like management interviews, site visits, audited and interim financial statements, corporate presentation, credit policy and risk control documents.
The due diligence process includes a thorough review of the loan originator’s accounting policies, e.g. income recognition and provision policy, which should be accounted for when making comparisons between different loan originators.
For each loan originator, the loan origination process, loan servicing and collections policies and practices are reviewed during client interviews. Moreover, Mintos obtains and assesses the loan originators internal performance reports.
Furthermore, a review of public resources is done (e.g. web search, press releases, industry reports, commercial databases). When applicable and available, references from the loan originator’s vendors, financiers, associations and other loan originators are obtained. CVs and references on the management team of each loan originator are gathered.
When will the Mintos Ratings be updated?
Mintos constantly monitors the loan originator’s performance by a review of the financials and the loan portfolio quality. In addition, information from client meetings, news, industry research and peer insights build up the data needed for the reassessment for all Mintos Rating factors. If there are material improvements or a worsening in fundamental factors, this could result in an immediate rating upgrade or downgrade accordingly. To give a few examples, events triggering a rating downgrade could include an increase in a non-performing loans ratio, an unfavourable change in the local regulation affecting the loan originator’s business or a forced restructuring or a default on any financial obligations, etc. The Mintos Rating upgrade would be applied if Mintos observes improvements in factors currently putting constraint on the Mintos Rating. For instance, a weakly capitalised loan originator’s rating could be reviewed after capital injection is received. Or in another case, if the loan originator operated in a jurisdiction where uncertainty of business restricting regulation adoption existed, a resolution and adoption of an acceptable regulation would be factored in the Mintos Rating.
Besides immediate Mintos Rating adjustments, they will be updated on an annual basis and include a complete reassessment of all the factors mentioned above.