Fitch downgrades Sinhaputhra Finance PLC to 'B(lka)'

Fitch Ratings Lanka has downgraded Sinhaputhra Finance PLC's (SFL) National Long-term rating to 'B(lka)' from 'BB-(lka)'. The outlook is negtive. Although liquidity pressure faced by the company has waned, Fitch notes the significant increase in the regulatory six-month NPLs and consequent deterioration in the net NPL/equity ratio, and depressed profitability.

The cashflows of SFL's customer base which consists of the SME segment were significantly impacted by the slowing economic environment witnessed since FY08.

This, together with SFL's focus shifting away from recoveries towards maintaining liquidity in the first half of 2009, resulted in a sharp increase in NPLs particularly under the regulatory six-month classification. Fitch is concerned by the six-month net NPL/equity ratio of 34.6 percent at end-December 2009 (sector average of 2.8 percent at end-September 2009), given SFL's low provision coverage on NPLs and weak internal capital generation.

The sector includes 11 registered finance companies (RFC; excluding companies related to the Ceylinco Consolidated group), which accounted for 56 percent of total non-Ceylinco RFC assets as at end-September 2009. The agency notes that an equity infusion is essential to stabilise the company's financial profile.

Fitch notes that although deposit outflows experienced by SFL and the wider RFC sector subsequent to the collapse of an unregulated 'deposit taking institution' in end-2008 were arrested by mid-2009, the company only fully complied with the regulatory minimum liquidity requirement in February 2010. However, SFL's holding of liquid assets in relation to fixed deposit liabilities at 15 percent at end-May 2010 is comfortably above the revised 10 percent regulatory requirement.