RATINGS
Vallibel Finance gets 'BB-(lka)'
Fitch Ratings Lanka has upgraded Vallibel Finance PLC's (VFL)
National Long-term rating to 'BB-(lka)' from 'B+(lka)'. The outlook is
stable.
The upgrade of VFL's rating reflects sustained improvements in its
credit metrics - in particular its asset quality, profitability and
capitalization - as well as its increased scale of operations, which
Fitch believes would help strengthen the company's balance sheet over
the medium-term. The Stable Outlook reflects Fitch's view that VFL would
be able to maintain its financial profile over the medium-term,
supported by ongoing improvements to its systems and processes and the
improving economic environment.
VFL's asset quality, which had weakened in 2008-2009, showed
continuous improvements from end-2009, aided by an improving
macro-economy and increased recovery efforts. Its gross NPLs (arrears in
excess of three months), which had reached their peak in end-September
2009, fell by 34 percent by end-September 2010.
This, together with aggressive loan growth, enabled the company to
post a gross NPL ratio of 7.0 percent at end-September 2010 - an
improvement from 11.2 percent at end-March 2010 (FYE10). However, Fitch
cautions that as the loan book seasons, there could be an increase in
NPLs.
Total advances grew 76 percent over September 2009-September 2010 on
the back of VFL's branch expansion in 2009 and 2010. The company expects
to migrate to a new operating system during 2011, which should enable it
to more closely monitor its growing loan book. Loans comprised mainly
hire purchase (HP) and lease facilities to individuals in the SME
segment for the purchase of commercial and more recently agricultural
vehicles.
Despite being faced with higher credit costs and narrowing margins in
H1FY10, VFL was able to post a return on asset (ROA) of 2.6 percent in
FY10, marginally lower than that in FY09 (2.7 percent).
Its profitability (ROA) improved to 4.0 percent in H1FY11, driven
mainly by wider net interest margins (NIMs), though also benefiting from
lower incremental provisioning costs and higher non-interest income.
NIMs widened to 14.1 percent in H1FY11 (FY10: 11.6 percent), as VFL's
deposits re-priced faster than its leases and HPs, which are generally
fixed for four years. Fitch notes that margins should revert to previous
levels in FY12 as VFL's lending products are gradually re-priced.
VFL's deposit growth of 40 percent in H1FY11 (FY10: 39 percent) did
not keep pace with the rapid loan growth during the same period.
Consequently, loans to deposits remained high at 132 percent at
end-H1FY11. However, with its wider branch network, the company's
deposit base should expand over 2011.
VFL raised Rs 114 million through an initial public offering of its
shares in April 2010, diluting its parent's - Vallibel Investments Ltd
(VIL) - stake to 72.87 percent. Following its equity infusion, VFL's
available capital buffer to meet potential loan losses (net NPLs/equity)
improved to 23.6 percent at end-September 2010 (FYE10: 51.8 percent),
and compares well with peers'. Capital adequacy remained comfortable
with the company maintaining a tier 1 capital adequacy ratio of 18.2
percent at end-September 2010.
Upside movement in VFL's rating would depend on it sustaining asset
quality and profitability at levels seen in H1FY10, while also having
available a healthy capital cushion to meet potential loan losses and
continuing with ongoing improvements to its risk profile.
Fitch upgrades People's Leasing Finance to 'BBB(lka)'
Fitch Ratings has upgraded Sri Lanka's People's Leasing Finance Plc's
(PLF) National Long-term rating to 'BBB(lka)' from 'BBB-(lka)'. The
outlook is stable.
The upgrade reflects Fitch's view that support from its parent,
People's Leasing Company Limited (PLC, 'A(lka)'/Stable, a 93 percent
ownership), is more likely to be available than in the past. This is in
turn premised on the agency's view that PLC's stand-alone financial
strength has improved over the past 12 months.
Unlike PLC, PLF is licensed to mobilize public deposits, and
therefore helps to diversify PLC group's funding base and reduce cost of
funds. PLC also channels Islamic lending products via PLF, broadening
the group's lending portfolio.
The ratings could be upgraded if there is a greater operational
integration between PLC and PLF, or an increase in PLF's strategic
importance to the PLC group - measured by the proportion of
deposit-funded group-assets - while maintaining healthy asset quality
and profitability. Conversely, a weakening of PLC's stand-alone
financial position, or a perceived waning of PLF's strategic importance
to PLC, could result in a downgrade of PLF's rating.
PLF's gross advances grew by 68 percent in the six months ended
September 2010 (6 m FY11), driven by renewed marketing efforts amid
improving economic activity. At end-6 m FY11, PLF's advances consisted
of lease and hire purchase contracts (76 percent) and sundry loans (24
percent), which are predominantly used for financing motor vehicles.
Fitch notes that on 49 percent of its sundry loans, the company would
need to resort to legal recourse for the ultimate recovery of the asset,
and is therefore more risky. To reduce this risk, PLF maintains that
such products are generally disbursed selectively to customers with good
repayment records.
PLF's NPLs, at the regulatory six-month arrears level, have broadly
remained stable in absolute terms between December 2008 and September
2010. Gross six-month NPLs reduced to 5.7% of gross advances, from 11.3
percent, on the back of strong loan growth during the above period.
Fitch expects PLC's strong operational influence to continue to
strengthen PLF's risk management processes and controls. However, any
compromise in lending standards amid the current high loan growth could
weaken asset quality over the medium-term, as the portfolio seasons.
PLF's deposit growth outpaced loans in 6 m FY11 (+75 percent). The
company's average interest cost has reduced in line with market interest
rates, while the average premium offered on deposit rates has narrowed
compared to larger competitors', and is indicative of its improving
deposit franchise. At end-6 m FY11, PLF's deposits funded 6 percent of
PLC group's assets (end-March 2010: 5 percent).
PLF's profitability as measured by return on assets (ROA) improved to
an annualized 2.20 percent at end-6 m FY11 (FY10: -4.04 percent), helped
by widening net interest margin and low credit costs. The company
received a capital injection of Rs 567 million in October 2010, which
improved its regulatory capital adequacy ratio to over 15 percent, from
a temporarily weakened 7.10 percent at end-6 m FY11.
PLF is evolving into a mid-sized registered finance company, with a
network of 23 outlets. At end-6 m FY11, the company's asset base stood
at Rs 4.1 billion.
RAM reaffirms Arpico Finance ratings at BB and NP
RAM Ratings Lanka has reaffirmed Arpico Finance Company PLC's
long-and short-term financial institutions ratings at BB and NP,
respectively.
Concurrently, the outlook on the long-term rating has been revised
from stable to positive. The positive outlook reflects the considerable
improvement in the company's asset-quality indicators in recent years,
despite the non-conducive economic climate. Arpico's ratings are
supported by its better-than-average asset quality and adequate capital
base.
Nevertheless, the ratings are weighed down by high overheads, which
hinder Arpico's performance, and its small size.
Established in 1951, Arpico is the second-oldest registered finance
company (RFC) in Sri Lanka. Despite its long operating history, the
Company has remained small, accounting for less than 1 percent of the
industry's total assets as at end-March 2010.
Arpico has maintained its better-than-average asset quality. The
company's gross non-performing-loan (NPL) ratio eased to 3.08 percent as
at end-August 2010, from 4.83 percent as at end-FYE March 31, 2009 (FY
Mar 2009).
Its achievement in curtailing NPLs is even more impressive
considering that its gross NPL ratio had climbed up to 32.01 percent as
at end-FY Mar 2004.
Notably, Arpico has managed to improve its asset quality despite the
harsh economic climate that prevailed over the last two financial years,
during which most of its industry peers had reported worsening NPLs.
The Company's better showing is anchored by a reduction in absolute
NPLs through its conservative lending, strengthened monitoring and
recovery procedures as well as expanding loan portfolio. Adequate
provisioning has permitted Arpico to also record a better net NPL ratio
of 1.26 percent as at end-August 2010 (end-FY Mar 2009: 2.41 percent).
While its asset quality has ameliorated, Arpico's performance has
still been hampered by rising overheads and lacklustre demand for real
estate. The Company's cost-to-income ratio had been elevated to 94.35
percent as at end-FY Mar 2010 (end-FY Mar 2009: 90.48 percent).
Furthermore, overheads are expected to ascend in line with the
opening of new branches. Nonetheless, RAM Ratings Lanka expects Arpico's
performance to improve once the new branches break even.
Meanwhile, we opine the company's capital cushioning is adequate. The
company's core and overall capital-adequacy ratios remained at a
respective 14.83 percent and 17.51 percent as at end-FY Mar 2010, well
above the minimum statutory requirements of 5 percent and 10 percent.
RAM Ratings Lanka opines that Arpico's funding and liquidity levels are
moderate; the company's deposit base had charted robust growth during
the reviewed period. Nonetheless, aggressive loan growth has diminished
Arpico's liquidity position, albeit it remains at manageable stance. |