Fitch affirms Senkadagala Finance's 'BBB+(lka)' rating

Fitch Ratings Lanka has affirmed Senkadagala Finance Company Limited's (SF) national Long-term rating at 'BBB+(lka)'. At the same time, the agency has affirmed SF's 'BBB+(lka)' national rating assigned to the 2005/2009 Unsubordinated Redeemable Debentures. The outlook on the ratings is stable.

The rating reflects SF's strong profitability and comfortable capitalization as well as its medium sized asset base and limited revenue and funding diversity.

Portfolio growth slowed to 17.2% in FY07, suppressed by the high interest rate environment, compared to the CAGR of 66% maintained over FY03 to FY06 which was supported by branch expansion.

Hire purchases (HP) grew substantially in FY07; this was due to the higher demand for HP owing to the tax advantage enjoyed by HP borrowers as rentals do not attract VAT, as well as greater activity in the second-hand vehicle market where HP is the preferred option. Consequently, HP dominates the portfolio, accounting for 51% of the total at FYE07 although leases are still significant, accounting for 42% of the total at FYE07.

Healthy margins from SF's exposure to the subprime customer segment enabled ROA to remain strong at 6.4% in FY07. This was despite a decrease from 6.8% in FY06 due to higher provision charges and higher operating costs resulting from the expansion in its branch network.

In FY07, SF ceased to follow its policy of writing off loans in arrears for over six months (except for those secured by deposits) and commenced provisioning against such loans according to the guidelines issued by the Central Bank of Sri Lanka (CBSL).

Consequently, gross NPLs (defined by Fitch as advances in arrears for over 3 months)/gross loans increased to 10.8% at Q108 and 8.0% at FYE07 from 4.0% at FYE06.