Mortgage lending in Nigeria has received renewed interest, with new investment in mortgage businesses, acquisitions and the resuscitation of formerly ailing Primary Mortgage Institutions (PMIs). Given continued economic growth and the growing significance of the middle class, mortgage lending is expected to be an area of growth going forward.

Agusto & Co. currently provides short term Issuer ratings of PMIs on a solicited basis. An Agusto & Co. PMI Rating is an assessment of the financial condition of the PMI and its capacity to meet its obligations –in local currency, as at when due.
We employ a top down approach that begins with Macroeconomic Analysis, in which we center on macroeconomic & political trends over the most recent five year period and the current state of the economy to ascertain how key variables impact the mortgage lending sub sector.

Our Industry analysis, which includes a review of the competitive landscape, regulation and structure of the mortgage sub sector, helps determine the degree of business risk faced by the PMI, establish overall trends and thus facilitate a company to industry comparison.

Obligor Analysis
In arriving at a rating, Agusto & Co. considers both qualitative and quantitative factors. Each factor is assigned a specific benchmark, which we have arrived at from our in-depth research into the mortgage industry. Some of the factors considered in our quantitative analysis include:

Capital Adequacy & Leverage
Capital plays a key role in the PMIs ability to grow business volumes and absorb possible losses. We thus consider the strength of an institution’s capital to be a key rating concern. In analyzing the adequacy of the PMIs capital, we factor the adherence to regulatory capital requirements and stress test certain capital adequacy ratios to examine the impact of erosion of capital from additional provisioning for non-performing assets.

Asset Quality
Upholding property rights and judicial under-capacity are some of the hindrances to a thriving mortgage sub-sector in Nigeria. This has significance for the asset quality of most PMIs.  In forming an opinion on asset quality, we consider the quality of the PMIs assets and risk management framework. We lay considerable emphasis on risk management, as we recognize that the PMIs risk management practice is indicative of future asset quality. Our analysis includes a review of the PMIs risk management structure, risk management culture, mortgage origination and monitoring processes as well policies concerning provisioning and recovery.


Performance
Our performance analysis seeks to determine the PMIs profitability and the sustainability of earnings. Earnings breakdown aids in ascertaining the strength of core earnings as well as diversification of earnings. Given the relative underdevelopment of the PMI sub sector, we consider product innovation and the ability to broaden both business scope and customer base key to sustaining earnings.
The effect of the interest rate environment and competition on the PMI is reflected in the PMIs net interest margin. We also analyse the PMIs cost structure to arrive at an opinion on efficiency. Our efficiency ratios include cost to income ratios and staff expense to income ratios.  Profitability analysis also includes traditional measures of profitability i.e. pre-tax return on equity (ROE), pre-tax return on assets (ROA) as well as pre-tax return on earning assets (ROEA).

Funding & Liquidity
A strong liquidity profile remains a key success factor in non-bank financial institutions as it can help the institutions through tough times. In analyzing the liquidity of the PMI, we consider the liability generation capacity of the PMI as well as its access to external funding sources. 
We consider funding mix, stability of funding and cost of the PMIs deposit and resource base. The PMIs adherence to regulatory liquidity guidelines is also a rating consideration.

Ownership, Management and Staff
Agusto & Co focuses on ownership structure of the company, track record of the principal owners and their ability to give support to the company should the need arise. In addition, we also focus on performance of management. A competent management team with clear strategic objectives that has demonstrated its ability to grow the business and take advantage of opportunities is a reflection of management capabilities. Agusto & Co also reviews the investment and financing policies of the company which is an indicator of management’s propensity for risk. In addition, the ability of the management to comply with laid down regulations that pertain to the mortgage business is key. Agusto & Co also looks at personnel policies of the company and its staff productivity, which is compared to its’ peers in the same industry.  

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