Senkadagala Finance rated 'BBB+(lka)'

Fitch Ratings Lanka has affirmed Senkadagala Finance Company PLC's (SFC) National Long-Term rating at 'BBB+(lka)'. The outlook is stable.

The rating on SFC's senior unsecured redeemable debentures of up to Rs 300 m has also been affirmed at 'BBB+(lka)'. The ratings reflect SFC's healthy asset quality, improved credit control systems, and long operating history of over 40 years. The ratings are, however, constrained by the company's greater reliance on borrowings compared to peers and limited access to equity capital. A rating upgrade is contingent upon the company diversifying its funding base, strengthening its capitalization and franchise while maintaining its asset quality and profitability.

Deterioration in asset quality, or capitalization or an increase in encumbered loans and unsecured creditors, may lead to a rating downgrade.

Pre-tax return on assets (ROA) increased to 8% in the six months ended September 2011 (H112) from 7.0% in FY11, supported by realised capital gains on equity portfolio and recoveries on bad debts. Pre-tax ROA adjusted for capital gains was 7% at H112 (FY11: 6%).

Funding through borrowings formed 51% of assets in H112, which are largely on floating rate and pegged to the average weighted prime lending rate.

Borrowings consist of securitisation loans and debentures. Securitised loans were 73% of borrowings at end-September 2011 (end-March 2010: 57%) and have historically been higher than peers.

Falling market interest rates since 2009 have led to funding costs declining continuously since FY10.

Net interest margins (NIMs) widened to 14% in FY11 from 11.9% in FY10 as existing low market interest rates resulted in a continuous decline in borrowing costs, with lending yields slower to follow as these are largely fixed for four years.

NIMs narrowed to 10.2% in H1FY12 because yields caught up with declining funding costs as the company grew its loan book.