Ratings

Fitch affirms CF at ‘A+(lka)’

Fitch Ratings Lanka has on December 10 affirmed Central Finance Company PLC’s (CF) national Long-term rating at ‘A+(lka)’. The agency has also assigned an ‘A(lka)’ rating to CF’s proposed subordinated debt issue of Rs 500 million with a tenure of five years. The outlook is stable.

The subordinated debentures, in terms of priority, will rank below deposits and all senior debt obligations, but above ordinary and preference shares. Consequently, and in accordance with the agency’s criteria, the rating assigned for the subordinated debentures is one notch lower than CF’s implied senior debt rating of ‘A+(lka)’.

CF’s ratings factor is in its relatively good financial profile in the Registered Finance Company (RFC) sector in Sri Lanka. The ratings also take into account CF’s lack of product and funding diversity in relation to banks (an inherent limitation of the RFC business model).

An upgrade of CF’s rating is contingent upon increased diversity of its funding sources and access to capital markets commensurate to ‘AA(lka)’-rated peers, as well as upon strengthening of market share of its core operations, while sustaining healthy asset quality and profitability. Conversely, a downgrade could occur in the event of a sustained weakening of CF’s asset quality or profitability.

CF’s loan book grew by 11 percent in the six months to end-September 2010 (H111) as the demand for vehicle leases increased in the post-war economy. Vehicle finance (leases and hire purchase agreements) accounted for 94 percent of the loan book, with the balance for loans to the SME sector and inter-company loans. CF is also the largest provider of operating leases, primarily to manage vehicle fleets of corporate clients (5 percent of assets at H111).

Bulk of CF’s asset book was funded by time deposits (51 percent of assets), with a 29 percent yoy growth in FY10. The company’s matching of interest rate sensitive assets and liabilities was good relative to peers’; at FYE10 rate sensitive assets improved to cover 88 percent of rate sensitive liabilities in the less-than-one-year category (FYE09: 76 percent).

In addition, CF had interest rate swaps covering Rs one billion to mitigate interest rate mismatches at FYE10. Its statutory liquid-assets ratio remained strong at above 20 percent in H111.

CF’s NPLs reduced in nominal terms with its NPL and gross loan reducing to 7.5 percent in H111 (FYE10: 9.7 percent) due to improving economic conditions and concerted recovery processes.

The corresponding ratio for advances in arrears more than six months (6mNPLs) was 3.5 percent at H111 (FYE09: 4.1 percent). Vehicle segments that under-performed relative to CF’s overall portfolio were financing of tractors, which accounted for 4 percent of vehicle financed, but 6mNPLs were in excess of 10 percent. Some of these segments were affected by inclement weather patterns that affected farmer revenues in previous agri seasons.

RAM Ratings Lanka assigns ‘BBB -’ for CDB

RAM Ratings Lanka assigned the respective long-and short-term financial institution ratings of Citizens Development Business Finance Limited (‘CDB’), at BBB-and P3; the long-term rating has a stable outlook. The Company’s ratings are upheld by its improving performance and healthy asset quality. Nonetheless, the ratings are pressured by its marginal capital cushioning.

CDB had operated as a specialized leasing company from 1995 until May 2009, when it obtained a registered finance company (‘RFC’) licence. It is now a medium-sized RFC, accounting for 4.07 percent of the industry’s assets as at end-September 2010. The Company, formerly known as Ceylinco Development Bank Ltd, had reinvented itself as Citizens Development Business Finance Ltd amid the crisis that had brought down the Ceylinco Consolidated Group (Ceylinco). Concurrently, the company had made changes to its board by bringing in new independent members, in a bid to overcome the confidence crisis. Its recent listing on the Colombo Stock Exchange (CSE) has further improved the transparency of its disclosures.

CDB had aggressively expanded its loan portfolio to Rs 6.60 billion as at end-October 2010, from Rs 5.29 billion as at end-FYE March 31 2010 (FY Mar 2010). This had followed its efforts to expand its loan books after having curtailed lending in fiscal 2009 due to the weak economic situation then.

The expansion had been achieved through CDB’s network of 30 branches and two service centres, with a focus on three-wheeler leases. Simultaneously, the company had strengthened its monitoring and recovery procedures, which had in turn reduced the level of its non-performing loans (NPLs) to Rs 330.77 million (end-FY Mar 2010: Rs 396.29 million). As such, CDB’s gross NPL ratio ameliorated to 5.01 percent as at end-October 2010 (end-March 2010: 7.49 percent). We also note that the Company’s credit quality has remained better than that of its similar-sized peers.

Meanwhile, CDB’s financial performance improved in the first seven months of FY Mar 2011, supported by better net interest income arising from its expanding loan books, reduced provisioning and mark-to-market gains on its short-term investments. Accordingly, the company’s net interest margin (NIM) widened to 9.89 percent (FY Mar 2010: 7.17 percent).

At the same time, its cost-to-income ratio eased to 56.51 percent, well below the industry average of 70.03 percent. As such, CDB’s return on assets (ROA) and return on equity (ROE) clocked in at 6.27 percent and 64.50 percent as at end-October 2010, better than the corresponding industry averages of 2.68 percent and 24.06 percent.

That said, the ratio is still above the regulatory minimum of 10%. The Company’s funding base was dominated by customer deposits, which accounted for 82.00 percent of its financing needs as at end-October 2010.

Although CDB’s ratings are constrained by its marginal capital cushioning, it has still managed to comply with the minimum regulatory capital requirement. Its overall risk-weighted capital-adequacy ratio (RWCAR) improved to 10.38 percent as at end-October 2010 (end-FY Mar 2010: 9.17 percent), on the back of more robust internal capital generation.

This is also above the regulatory minimum of 10 percent. RAM Ratings Lanka expects CDB’s capitalization to strengthen further as its profitability improves.