Welcome to the 2023 full-year results presentation of ASA International. My name is Mischa Assink, I'm the Head of Investor Relations, and I'm here with Karin Kersten, the CEO of ASA International, and with Tanwir Rahman, the CFO. We will first go through the slides, and after that we can discuss your questions. Please click at the question button on the bottom of your screen to submit your questions. I now hand over to Karin.
Thank you, Mischa. Welcome to the listeners to this webcast presentation of the 2023 results. Let's start on ASA International. We are one of the world's largest international microfinance institutions, and it's our vision to contribute to just and financially inclusive societies. Our purpose is, like the United Nations SDG Goal 1 , to reduce poverty and to enable female empowerment to female entrepreneurs who have difficulty in accessing financial services, especially loans. We want to enhance their social and economic position, and our clients are typically low-income entrepreneurs, and we want to increase their financial inclusion. Our company values are professionalism, integrity, and teamwork. The teamwork is not only relating to teamwork amongst colleagues, but also our clients help us with the teamwork.
Our female entrepreneur clients typically have the role of chairman, treasurer, and secretary in our client group, which is one of the key elements in our ASA model. Looking at our business at a glance, we are operating in 13 countries in which we provide loans to our female entrepreneurs, and that's part of our well-diversified strategy. We do have branches deeply rooted in the communities, and our 13,500 employees are mainly loan officers serving our clients in the field. The central teams in Bangladesh and Amsterdam only comprise of less than 150 colleagues, so the majority is in the field. We do serve 2.3 million clients across Asia and Africa, and our outstanding loan portfolio amounts to roughly $370 million. The highlights of our results in 2023 are that the financial and operational performance in the second half of 2023 has improved compared to the first half.
If you look to the number of clients in the second half, the growth was +5% of clients. If you look to the pre-tax profit, the total year amount in 2023 amounted to $32.2 million, while the first half of the year only was less than $14 million. It should take into account that, and we will tap into that later in hyperinflation, the first half should be even corrected for that. T he second half is much better than the first half. The same goes for the net profit. The total year amounts to $8.8 million, while the first half was less than $4 million. If you look to the outstanding loan portfolio of around $370 million, it has grown +$35 million only in the second half of 2023.
If you look to our key metric of the quality of the portfolio, which is PAR, portfolio at risk, it improved from 5.9% at the end of 2022 to 2.1% at the end of 2023. Our ECL reserve amounts to a bit more than $8 million, and if you compare that to the full year of 2022, it was nearing $70 million, so that reserve has decreased. With $48 million of unrestricted cash, we have sufficient cash to run our business. If we go to our key performance indicators, on the most right-hand side of the slide, you can see that the change in the second half of the year is plus 5% of new clients, but also our OLP per client, so the outstanding loan per client in dollar terms, has grown with 4% over the second half of the year, even though there are large FX devaluations.
The PAR has improved, and if you look to the return on equity, it is at 10.5% over the full year of 2023. If you would correct that for hyperinflation, it would be close to 18%. Let's turn a bit to hyperinflation because it's the first time since inception of the company that we have to deal with the effects of hyperinflation and hyperinflation accounting. In the IAS terms of IFRS, we have to apply hyperinflation accounting to two countries, which are Ghana and Sierra Leone. The reason for that is that the cumulative inflation was exceeding 100% over a three-year period of time. We had to correct our balance sheet and P&L items to the current purchasing power, and that related to a lower, I would say, paper profit of $5.4 million impact on the net profit, and it has increased the total equity by +$0.6 million.
The well-diversified portfolio. We are active in four regions in Asia and Africa, and if you look to the developments, you can clearly see that East Africa is a promising area. You can see +36% in constant currency growth over last year in East Africa. W e do see a very healthy market environment there, not only in terms of growth of our outstanding loan portfolio, but also in terms of the quality of the portfolio and also the smartphone penetration in those countries. W e would like to extend our digital financial services towards Tanzania and Kenya. If you look to Nigeria, you see that in constant currency, the portfolio shrunk. In Nigeria, in 2023, elections took place, and a demonetization took place in combination with high inflation. The full-year FX devaluation amounted to 100%, so you can see that the dollar terms of OLP shrunk there.
This brings us to the FX ratios, and hyperinflation makes that our focus is on a continued cash flow back to the holding company. From the holding entities, we do provide equity to our entities, as well as a shareholder loan in case it's difficult for an entity to get a loan, but also if the terms and conditions are not that favorable. The other way around, it's very important for us that the operating entities do pay back dividends. Their earned profits will be paid out to the holding entity in terms of dividends, but also transfer pricing is important. The entities will pay royalties and other fees, and also interest and loan repayments.
In some markets, we do need regulatory approval for these, and especially in Ghana and Pakistan, we are working on that, and this is one of our measures to go from local earnings and safeguard that in hard currencies at the holding entity level. Now I hand over to Tanwir, our CFO.
Thank you, Karin. T he message is financial performance has improved in H2 2023. We have a PBT of $32.2 million, which includes an adjustment for hyperinflation for $5.4 million. That brought us to a net profit of $8.8 million. T here is a big gap between the two, approximately $23.2 million, and we did indeed have a huge income tax expense of $20 million and a withholding tax expense of $3.2 million. W hat is that big $20 million? It does give an effective tax rate of 63%, whereas if things were normal, this would have been 47%. W ithin that $20 million, if things were normal and at the nominal rate of taxes for the countries, that number should have been $12 million.
Added to that $12 million is a $3 million underprovisioning of taxes related to Pakistan Super Tax that we had to take the hit this year for a retroactive application of an increase of that Super Tax. Then we have the deferred tax situation in India and in some of our holding entities. Because of not probable future profit, we couldn't take advantage of the deferred tax situation, and therefore we had to take a hit for $3 million there. We also did not get any credit for the hyperinflation adjustment. And lastly, there was a disallowance of deductible interest expense in Tanzania, which is around $1.5 million. A ll those one-off type of adjustments gave rise to that huge $20 million tax expense. Looking at the balance sheet, the OLP, $369.2 million, it grew 5% from last year, and in constant currency, we see an increase of 21%.
The gross OLP, it includes off-balance sheet items. Moving on to the client deposit side, we see a decrease from 2022, and the reason is because of the savings that we had to return in Kenya. Interest-bearing debt increased to $268.5 million, and later I'll share more details. We did manage to raise $179 million of fresh debt in 2023. The most important number there is the equity, and it did increase from $69.2 million to $76.6 million at the end of 2023, which is an 11% increase. Despite taking a hit of $24 million from FX Translation Reserve, it does show a healthy increase. We did get an upside of $600,000 from the hyperinflation adjustments, and the current year net profit is added. We had a yield of 39.1% for the year 2023. With a cost of funding of 10.8%, our margin stood at a healthy 31%.
The reason for an increase in net margin and yield is because most of our disbursements were from high-yield countries. There was an upward adjustment of interest rates in India and Sri Lanka, followed by the lifting of interest rate caps that also contributed to this healthy margin. Our funding remained broadly stable at 10.8%. As you can see, in H1, it was 10.7%. Despite commercial rates going up, we could balance this rate. Because of the focus that we did, we were aiming to get more local funding than the more expensive international fundings. Next one is on our funding profile. This is a mix of our strong funding profile. As you can see, it's a mixture of equity, microfinance loan funds from providers like BlueOrchard, Oikocredit, and Symbiotics. We have local deposits. We have loans from development banks and foundations like DFC, OeEB, and BIO.
We also have local commercial funding. Our asset tenors, our loans to customers, are shorter than our liabilities creditors tenor, so thereby we do maintain a favorable maturity profile. As I said earlier, $179 million of fresh debt was raised, and we had a healthy cash balance of approximately $48 million as of the end of the year. As of March 31st, we have a strong funding pipeline of $171 million. At the end of the year, the balance for credit lines with breached covenants amounted to $23 million, but we did subsequently manage to receive waiver on all those breaches. Again, on this funding profile, our aim is to increase our local deposits. With that, I'll pass it to Karin again.
Thank you, Tanwir. From the 2023 results onto March 2024 business update. H ow is the current year performing? W e would like to show that following two lines on this graph, a green and a blue. The green line is a measure for the growth of the book. T he disbursements being higher than the collections is a measure of growth of the portfolio. Y ou can see that in February and March, this amounts to 106% and 107%. If we look to our 13 entities, 10 out of the 13 are having a disbursement of higher than 100% vis-à-vis the collections. The blue line is a measure for quality of the book. It relates to the collection efficiency, hence the percentage of money we collect as a percentage of what we should collect.
This amounts to a stable 98%, even including the markets that face some market difficulties like Nigeria. 11 out of our 13 countries have a collection efficiency between 97% and 100%. You also see that our book is growing. The current book amounts to $380 million, and if you would compare that to last year March, so like-for-like the same month of the year, it's 13% higher even in dollar terms with the FX devaluation. The blue line on the bottom chart, the PAR, is an indicator for quality as well. You can see that the PAR, where it was at the end of the year around 2%-2.1%, it now has decreased to 1.8%.
On the regulatory side, which is key for obtaining the licenses we wish to obtain, but also for approval of dividends and transfer pricing, which were important items also to mitigate the effects of FX and hyperinflation. T he update is that in Pakistan, we have been granted approval for the commencement certificate, so the license to go from microfinance lending to microfinance banking. We have migrated the loan system by Temenos Transact, our new core banking system. By doing this, 660,000 clients out of the 2.3 million are now onboarded on our core banking system. The State Bank of Pakistan has approved a dividend over the 2023-2022 results, and we are awaiting an approval for the interim dividend over the 2022 results.
In Ghana, the Central Bank of Ghana has approved our application for digital financial services, and the dividend declared over the 2022 results was not only approved but also fully paid. In Nigeria, we also make progress on the approval for the payment of dividend. In Kenya and also Tanzania, we are aiming to apply for a deposit-taking license to become a microfinance bank. That brings us to some changes in the performance-driven approach. T he strategy which was set, which aims at adding a digital channel and going into more products and services, we still have that strategy and want to execute that. In terms of the performance-driven approach, in terms of governance, we have set out a clear executive committee with per area of responsibility across the geographies.
We have launched a few new committees, for example, an Asset and Liability Committee, but also some strict policies like an Equity Hedging Policy, a Concentration Risk Policy to steer the business and to work on the right capital allocation for choices in our business. In terms of measurement, we have set clear budgets and targets ahead of the start of the year. And from an intention to do the leaders doing their best in local currency, we have changed the practice to a commitment in dollars. Each and every leader, being the CEO and CFO in a country, has committed to a result in dollar terms. We have defined very clear performance indicators for each country with key metrics on the loan portfolio, the quality, the growth, the cost-to-income ratio, the margin. We are measuring that via our so-called quarterly business performance challenge meetings.
We keep track of that performance and measure it. In the role model approach, we are seeking out several new leaders following our strategy, which will require also new skills and experience in terms of going from microfinance lending to microfinance banking. Alongside of that, we are also adding digital channels and will require also some new skills and leadership skills. The growth strategy that had been set is still very valid, and we remain focused on increasing financial inclusion by offering more loans and also by growing the voluntary savings. We are working on adding the digital channel and also digitizing internal processes in order to allow our loan officers to spend less time on internal processes and more time on serving clients and collecting overdue loans.
We also want to offer digital products and services via our Digital Financial Services app, ranging from payments, savings, but also value-added services. By that attractive offering, we want to aim for new clients. If you look to the digital advancement, at the moment, the AMBS system, the in-house developed loan system, is the key system. In Pakistan, we have migrated to the core banking system. At the moment, we are working on launching this Digital Financial Services app, and the Supplier Marketplace app is active in Ghana. If you look to the client channel, what is essential is that our branch model, with the multiple branches, is deeply rooted in the communities. We want to keep that, and we want to add a digital offering on top of that.
In terms of services and products and services, we want to have an enhanced product and services offering and add savings not only from our borrowers but also from the public and add payments and a supplier marketplace. The internal process, we would like to migrate from manual and complex processes via the digital app to digital and simplified processes. If you look to the progress on this, this year we have made a successful migration to the Temenos Transact core banking system in Pakistan. And at the moment, we are testing in Ghana, and we do expect to launch the core banking system plus the DFS app, the digital financial services, in Ghana. And at that moment, Ghana will be the first market where clients can obtain a loan digitally, can do payments via an app, and also apply for savings.
The Supplier Marketplace app is not a financial product but a marketplace whereby we want to enable clients to, at a more easy way, buy their goods and logistics. This app is now being onboarded by 3,000 customers. If you look to the pictures on this sheet, you can see that on the left-hand side, we go from client booklets on paper, weekly or biweekly or monthly installment payments in cash, to, on the right-hand side, mobile payments, digital financial services now and in the future. A few weeks ago, when I was visiting Ghana and asked the question, who would have a mobile phone, who would have a smartphone, and who would be interested in using a digital app for loans, payments, and savings, 100% of the clients raised their hands.
W e do see increased smartphone penetration and also a willingness from our clients to look out for the digital financial services to be launched. That brings us to the summary and the outlook. L ooking back on the 2023 results, we see the financial performance over the second half of the year was better than over the first half. I if you look to the overall profit for the year, it went down from 2022, mainly because of FX movements, demonetization, plus elections in Nigeria, and the first-time application of hyperinflation accounting in Ghana and Sierra Leone. Our second-half performance had improved. We grew our loan portfolio quality from 6% to 2%. In constant currency, we grew our OLP over the year with +21%. And the improvement in performance was mainly driven by five large countries: Pakistan, the Philippines, Ghana, Tanzania, and Kenya.
The outlook for 2024 remains positive. W e do see that the better trend of the second half of 2023 is a good marker for the 2024 outlook. A lso the first three months do give a good indicator of the size of the book, the growth of the book, and the quality of the book. W e do foresee improved business performance for 2024. However, inflation, FX movements, but also hyperinflation will have an impact for 2024. We do expect Ghana and Sierra Leone to be in the hyperinflationary accounting environment for 2024, a nd Pakistan and Nigeria are on the watchlist. That brings us to the end of the summary, outlook, and the presentation. I hand back to Mischa.
Yes, thank you, Karin. We received questions and will discuss them one by one. The first one is, where is cash held and how do you reduce currency risk?
Tanwir, do you want to take that?
Yeah. W here is cash held? I mean, we have cash at the subsidiary and at the holding level, so both places. T he second part is, how do we reduce the currency risk? The currency risk. Yeah. W e resort to hedging, a nd all our 95% of our loans are hedged. T hat's how we mitigate the currency risk, basically. The incoming from the lenders and whatever we have left over in the country, we upstream it right away so that there is less impact of devaluation in the country.
O n top of the hedging of the loans, we also have an equity hedging policy. O n top of that, we also want to aim for not only the dividend payments but also interim dividend payments.
Because in an environment of devaluation of the local currency, it helps if we upstream, like we showed in that sheet, not only dividend on an annual basis but, where applicable and possible, also upstream interim dividend. T hen it's transferred to hard currency and the FX risk is mitigated.
Okay. It's good that you mention the equity hedging strategy because that was actually the second question we got. Can you provide some more color on that equity hedging strategy and how it might be achieved, and what is the timeline for it?
Yeah. Well, the equity hedging policy looks at so our loans are hedged. But if you look to the equity hedging, what we do compare is the FX forward rate to the cost of a hedge. W e will monitor that closely in ALCO, and that will be done on an ongoing basis.
O f course, if the FX risk increases or the uncertainty is there, then the cost of hedging also is high. But we constantly monitor that.
Okay. Yeah. Thank you. Then a next question is, what are the next steps for the digital rollout after Pakistan and Ghana, and w hen do you expect the full rollout to be completed?
Yeah. It's a huge operation because it's rolling out a core banking system and a digital financial services app. I f we look to the countries, then we aim for a rollout to all our countries in around a five-year time frame. But of course, we'll look at the most important and most promising markets to start with. A t the moment, we already onboarded 660,000 clients with Pakistan. This year, we are rolling out to Ghana, which also is a large market.
Next year, we aim for the rollout in Tanzania and Kenya. If you look back to the five countries we mentioned as the key countries, then we already, by the end of next year, cover four out of our five most key entities. After that, Nigeria and Philippines are very high on the list, and then the remainder will follow.
Okay. The follow-up question for that is, what is the impact of the digital rollout on your OpEx?
Yeah. It's a very good question. T here are several elements. There are investments in new software, which are partly capitalized. Then there is an impact, of course, on the operational cost. And during the transition from the one to the other system, we need to keep two systems alive: so the current AMBS system and the future core banking system along with the DFS app.
D uring this migration, the operating cost will be a bit higher. After five years, when you can phase out AMBS, you will get a reduction. On the other hand, operational costs also relate to the cost of our staff, being the loan officers. If you look to their current, mainly manual and complex processes, this will or be a decrease in the cost of loan officers, o r if we turn it around and aim for growth, we can serve more clients with the same operational cost. W e do aim for growth, and we foresee that a loan officer can serve many more clients because that afternoon is not mainly spent on internal processes, but more groups can be served. W e also do expect that, by the digital financial services, we'll have a lower frequency of the client group meetings.
T hose will be elements on investments and operational cost. I n terms of revenues or benefits, we do expect, by the better client offering, also to have an enhanced product offering and so more clients, but also more income from clients because not only income from loans but also some from payments, and w e'll have some funding benefits if we gain savings from our clients because the cost of funds from savings from clients are expected to be lower than the lending rates from our institutional lenders.
Okay. Then we got a question on the dividend streams from the subsidiaries to the holding. Are there still delays in that dividend streams upwards to the holding that concern you?
Well, we already tapped on that on the sheet of the regulatory update.
W e do see that now, also if you look to the latest macro news and financial market news in Pakistan, we do see that they are picking up on those dividend payments. W e do see improvement there, and t he critical ones where approval is needed and which are large have been tapped on in the presentation, especially Pakistan, Nigeria, and Ghana.
Okay. I s that there are delays, but this is improving, but is it impacting your decision not to reintroduce a dividend? C an you explain what are the dividend targets going forward?
Yeah. If we look to dividend, so our dividend policy is to pay out 30% of our net profit as a dividend. W e wish to go to our dividend policy in the future. But if you look to dividend payments, then it depends on the profitability and the liquidity.
W e'll look at that closely before we go into dividend payments.
Okay. Karin, there's also a question on the fact that you took over as CEO from Dirk Brouwer since June 2023. Can you tell us what you've learned in those first months on the job, and what are you planning to change?
Well, if I look back from June last year, we had quite some headwinds in the markets. N ot only the share price went down, but there were also, well, some difficult market circumstances with high inflation, high FX developments, and also in the midst of implementing the strategy of going to a digital channel and adding more products and services. Looking back on it, it's been a whole trajectory, and I would say a transformation journey.
I f you look at that, we've taken a lot of steps, not only in terms of making progress on the licenses but also in terms of implementing the digital element, so the successful migration of the core banking system. W ell, what has remained key and very promising is the appetite of our clients for loans but also the trust they do give us, and they really like the ASA business model. W e are taking really steps, not only in moving and implementing our strategy but also in the performance-driven culture by changing some of the governance elements, the policies, the measurements. W ell, if you look at the team, it's really, really a high-quality team, very professional and w e are mixing these elements of knowledge of microfinance with newly required elements and experiences to navigate into the future.
Okay.
There is a follow-up question on the OpEx itself. What are your expectations on OpEx growth in the current year, 2024, taking the impact of hyperinflation?
O n the OpEx side, expectations are to maintain the current level as we did in 2023. In some instances, we did come out lower in that line item. It's just that the cost-to-income ratio shows a higher number because of the income factor and not only the pure cost. T he plan is to maintain a similar level going into 2024.
Okay. I think this one is also for you, Tanwir. A question on the effective tax rate, where you mentioned without the special items, especially in the first half of the year, the tax rate would be around 47%. What do you think would be a normal and more typical effective tax rate?
With rates going up more than 40% in Pakistan, I would say we do call that 47% a normalized rate. Taxes have gone up in our jurisdictions, and they are hovering around 40% plus.
Okay. Thank you for that. A nother question is, what are the consequences of salary increases on all your employees in terms of cash flows and profits? What salary changes do you expect for the year, 2024?
Well, I would turn that to, it's not key to look at the salary but to look at the cost-to-income, a nd that's where we measure. W e really look at the number of clients being served by each loan officer and also the OLP per client. T hose are two key metrics where we look at rather than only the salary cost of the employees. We do see very high inflation in several of the markets.
I n an inflationary environment, we do see some of the operational costs going up but also the staff cost because we want to also look at the market rates there in order to look at staff cost. But at the same time, with inflation, we also want to look at the efficiency and effectiveness of the loan officers as well as the income level. Because if there is inflation, we also tend to hand out slightly higher loans to the customers because they need to buy goods at higher prices as well. I t's not looking only at staff cost or staff cost rises but at the whole, yeah, element of all the cost and income effects by inflation.
Okay. This was the last question that we had. Thank you very much for your questions on this webcast. I hand it over to Karin for some closing comments.
Thank you. Well, in a nutshell, we have presented our 2023 results. The second half has been shown an increase in performance compared to the first half year. We also have seen for the first time hyperinflation accounting. We've shown a good start of the year in 2024 with healthy operational and financial performance, also a good quality of the portfolio. We've shown progress in the launch of our core banking system and digital financial services. We'll continue on that. T hat's the performance in a nutshell. We would like to thank you for your time and interest in our company. We will be available for follow-up questions via Mischa Assink, our head of investor relations. Thank you very much, and have a nice day.