Fitch assigns ‘BB(lka)’ rating to Sinhaputhra Finance

RATING: Fitch Ratings Lanka has assigned a National Long-term ‘BB(lka)’ rating to Sinhaputhra Finance Ltd (“SFL”). The outlook on the rating is stable.

SFL’s rating reflects its modest profitability, relatively better systems and procedures, as well as modest product diversity.

While SFL’s asset quality and solvency measures at a regulatory level were satisfactory, the rating was constrained by significantly weaker ratios at the more stringent three-month non-performing loan (“NPL”) classification.

SFL’s portfolio growth slowed to 28% yoy in FY06, versus 37% in FY05 due to SFL placing greater emphasis on the disposal of its repossessed vehicle stock, rather than on portfolio growth. SFL’s customers are limited to the Central Province and comprise the riskier sub prime market.

Vehicle finance (lease and hire purchase agreements) constituted the majority of the loan portfolio, at 56% at the six month period ending September 2006 (“end-6M06”), compared to 60% at FYE05. Loans to small and medium enterprises (“SMEs”), and to a lesser extent, personal loans to salaried employees comprise the rest of the portfolio at 44% at end-6M06, versus 40% at FYE05.

SFL’s return on assets (“ROA”) was 3.3% in 6M06 (2.8% in FYE06), below the industry average of 3.5%. Once the ratio was adjusted for non-recurring income, it falls to 2.5%. Fitch expects spreads as measured by net interest margin (8.1% for 6M06) to tighten somewhat due to competitive pressure but to remain healthy.

Fitch classifies NPLs as loans in arrears of over three months whilst the Central Bank of Sri Lanka’s (“CBSL”) regulations for finance companies require them to classify NPLs as any loans in arrears over six months, and begin provisioning thereafter.

SFL’s asset quality at the three-month level is poor with gross NPL/gross loans of 22.6% end-6M06 (38.8% at FYE05), partly reflecting the risk profile of the target clientele and the company’s business strategy.

Despite this, SFL’s asset quality at a six month level is on an improving trajectory due to focused recovery. SFL’s NPL ageing was satisfactory with 79% of NPLs falling into the three to six months ‘in arrears bucket’, where regulatory provisioning is not required for these NPLs.

Provision coverage for all NPLs in arrears over six months was in excess of 100% (on account of a general provision on repossessed vehicles).

However, the agency notes that SFL’s NPLs at the three-month level and resulting solvency as measured by Net NPL/Equity is significantly weaker than its peers and could present challenges for recovery in a potentially slowing economic environment.