LRA reaffirms BBB3 (Moderate Safety)/L3 ratings to LB Finance

LRA HAS reaffirmed the long-term financial institution rating of LB Finance Ltd (“LB” or “the Company”) at BBB3, with a stable outlook; the short-term rating has also been reaffirmed, at L3.

The ratings are premised upon the company’s improving financial performance and adequate asset quality; however these are partially offset by its weakening funding structure and inadequate capital cushioning.

Underscored by robust loan growth and large non-performing loans (“NPLs”) (6-months classification basis) write-off, LB recorded a significant improvement in its asset quality as at end-December 2006 (“Dec 2006”).

The gross NPL ratio ameliorated from 12.82% (FYE Mar 2006) to an adequate 5.18%. Regardless, LRA deems LB’s asset quality to be moderate premised upon its unseasoned new-portfolio. Moving forward, it is vital that LB maintains its gross NPL ratio on par with the industry to sustain its current ratings.

In line with LRA’s expectations, LB delivered a sterling performance in FY Mar 2006. Pre-tax profit stood at Rs 203.65 million, 240 per cent higher than the previous year.

This sturdy performance carried through to the following year, with a robust pre-tax profit of Rs 233.17 million for the first nine months, which surpassed the full-year’s performance of FY Mar 2006.

Annualised return on assets (“ROA”) and return on equity (“ROE”) stood at 5.72 per cent and 71.53 per cent, respectively, as at December 2006. The company’s aggressive loan growth has been achieved at the expense of higher funding and liquidity risks vis-a-vis its funding structure.

Bank borrowings have increased, leading to deterioration in its loan-to-deposit ratio, which stood at 121 per cent as at December 2006.

LRA has concerns regarding the present funding strategy as secured bank borrowings not only rank above the Company’s depositors, but also introduce funding-concentration risk.