Fitch affirms ETI at 'BB-(lka)

Fitch Ratings Lanka has affirmed Sri-Lanka-based Edirisinghe Trust Investment Ltd's (ETI) national long-term rating at 'BB-(lka)' with stable Outlook.

ETI's rating reflects its relatively weak core equity position and large exposure to real estate investments. It also takes into account the company's considerable exposure to, and solid franchise in, low-risk gold-backed lending (pawning), and its consequently sound asset quality.

Substantial improvement in ETI's core capital base and profitability while maintaining asset quality could result in a rating upgrade. Conversely, increased exposure to debt-funded investments leading to lower profitability, and/or deterioration in capitalization or asset quality could result in a downgrade.

Real estate investments accounted for 22 percent of assets for the nine months ended December 2010 (9MFY11; FYE09:24 percent) and are debt-funded. Considerably lower disposals of these properties in FY09-9M11 have weighed on profitability.

Consequently, profitability as measured by returns on assets at 1.7 percent in 9MFY11 (FY10: 0.6 percent) was low in relation to other registered finance companies (RFCs) rated by Fitch (FY10: 1.8 percent). The company expects to sell off a considerable share of its property projects by end-Q1FY12.

ETI has not undertaken further real estate investments since 2009 and has indicated that it will continue not to do so as it further sells down the portfolio.

Pawning increased to 74 percent of total advances at end-9MFY11 (FYE10: 68 percent; FYE09: 58 percent) enhancing ETI's asset quality and maturity schedules.

Gross non-performing advances (NPAs) accounted for 5.1 percent of advances at 9MFY11 (FYE10: 6.3 percent) and compared well with other RFCs rated by Fitch (FYE10: 12.9 percent). However, Fitch notes that asset quality could weaken as ETI grows its vehicle financing portfolio where NPAs are considerably higher (24 percent of advances at end-9MFY11).

Due to ETI's large exposure to pawning, which carries a low risk weight for regulatory capital adequacy computations, capital adequacy is within regulatory minimum requirements. However, Fitch notes that core absolute capitalization remains weak and core equity (excluding fair value gains on investment properties) was 5 percent of total assets at end-9MFY11.

As a result, ETI would need to strengthen its capital base to support future growth, particularly of non-pawning products which carry a higher risk weight.

ETI is a mid-sized RFC, and has been a closely held family-owned company since its establishment in 1967.