In addition, KBRA affirms the deposit and senior unsecured debt ratings of A-, the subordinated debt rating of BBB+, and the short-term deposit and debt ratings of K2 for its subsidiary,
Key Credit Considerations
CASH's diverse and rather unique revenue mix is a key strength supporting the company's above-average ratings. Noninterest income, primarily comprised of various stable fee revenue sources, has historically totaled over 40% of annual revenues, largely driven by CASH's robust payments division as well as its various tax services related products. Additionally, the payments division generates the majority of the company's funding with noninterest bearing accounts comprising over 85% of total deposits and total deposit costs at 0.39% for the company's fiscal year ended 9/30/2020. This dynamic has benefitted the company's earnings through its comparatively higher margins despite a lower concentration of loans in earning assets (52% at 9/30/20) as well as the large amount of cash assets on the balance sheet for FY20 related to the company's participation in the economic impact payments program, which materially lowered NIM (4.12% for FY20 as compared to 5.02% in FY19). CASH's risk profile is somewhat elevated due to an increasing concentration in higher-risk commercial finance loans, as demonstrated in the company's recent year above-average loss rates (NCO ratio of 0.47% in FY20, excluding tax service loan losses). Outside of its moderately elevated credit costs (provision expenses were 0.90% of average assets for FY20), the company's operating expenses has tracked well above peers at 4.4% of average assets for FY20, a factor of CASH's payments division, somewhat offset by the robust fee revenues it generates. CASH has generated strong earnings with returns on risk weighted assets tracking over 2% in recent years. With risk weighted capital measures largely in line with rated peers, KBRA views CASH's capital position as adequate despite rather volatile core capital measures, largely due to seasonal fluctuations in the balance sheet related to its refund advance tax loans and inflow of EIP deposits.
Rating Sensitivities
Material deterioration in credit quality with loss rates above peer averages - particularly within commercial finance - impacting the profitability of the company and decreasing capital measures below targeted levels, could negatively affect ratings. Additionally, the loss of multiple partnerships within the payments space that significantly lower future company revenues could also impact ratings.
ESG Considerations
KBRA's ratings incorporate all material credit factors including those that relate to Environmental, Social and Governance (ESG) factors. While ESG factors may influence ratings, it is important to underscore that KBRA's ratings do not incorporate value-based judgments. Throughout our analysis, KBRA captures the impact of ESG factors in the same manner as all other credit-relevant factors. More information on ESG Considerations for the Financial Institutions sector can be found here. Among the ESG factors that have impact on this rating analysis are the sound risk management practices of the company.
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