Ram ratings reaffirms BBB and P2 ratings of Alliance Finance

RAM Ratings has reaffirmed Alliance Finance PLC respective long- and short-term financial institution ratings at BBB (with a stable outlook) and P2. The ratings are supported by the Company's adequate asset quality and the resultant augmentation in its capital adequacy. On the other hand, the ratings are capped by Alliance's moderate financial performance, liquidity and funding levels.

With its 52-year track record, Alliance is one of the oldest finance companies in Sri Lanka. The Company remains vigilant about the health of its loan portfolio, which accounted for about 64 per cent of its total assets as at 31 December 2007.

Accordingly, Alliance reported a better-than-average gross non-performing-loan ("NPL") ratio of 3.31 per cent as at the same date. Considering the industry's generally deteriorating asset quality, RAM Ratings has a positive view of Alliance's ratio.

Meanwhile, the Company's provisioning level remained superior at 94.92 per cent. Concurrently, its exposure to share trading came up to a moderate 5.58 per cent of its total assets while exposure to inventories such as cars and furniture stayed at a benign 3.73 per cent.

Alliance's healthy asset quality had also enabled it to reduce its provisions from LKR 18.04 million in FYE 31 March 2006 ("FY Mar 2006") to LKR 14.75 million in FY Mar 2007. As a result, the Company's pre-tax profit leapt 23.67% year-on-year ("y-o-y") to LRK 100.10 million over the same span. In terms of returns on assets ("ROA"), however, the Company's performance remained at a modest 2.79% as at end-FY Mar 2007; this is expected to moderate further due to the high interest rate environment.

Meanwhile, interest-rate risk has assumed greater importance in the present context, especially when funding lines have variable rates.

Alliance's funding structure has a material 31% of total funding stemming from banking lines.

As a result the Company is exposed to significant interest rate risk and this will impact on its margins and profit performance. To address the heightened interest-rate risk, the Company has established a treasury department. Although this may not have a notable impact in the short term, we note that the Company has enhanced its risk-management capabilities, as underlined by its narrowing asset-liability mismatch.

Alliance's healthier asset quality and stringent provisioning policies have enabled it to maintain its ratio on net NPLs to shareholders' funds at less than 1% as at end-December 2007. Its Tier-1 and overall risk-weighted capital-adequacy ratio stood at 7.28% and 10.77% as at the same date.