Senkadagala Finance affirmed at ‘BBB+(lka)’

Fitch Ratings Lanka has affirmed Sri Lanka's Senkadagala Finance PLC's (SFC) National Long-Term Rating at ‘BBB+(lka)’ with a stable outlook. The agency has simultaneously affirmed the rating on SFC's outstanding senior unsecured redeemable debentures of Rs 300 million at ‘BBB+(lka)'.

SFC's rating reflects its long operating history and good credit profile which has been maintained through economic cycles, supported by sound credit controls, low refinancing risk and high profitability. However, a negative factor for SFC's credit profile is its elevated financial risk, as reflected in a reduction in its capitalisation during the financial year to end-March 2012 (FY12) compared with historical norms. This is due to the absence of capital injections to support SFC's high asset growth in FY12.

An upgrade of SFC's rating is contingent upon the company strengthening its franchise and improving its capitalisation to levels commensurate with asset growth, while maintaining strong asset quality and reasonable profitability. A continued weakening in SFC's capitalisation and/or financial flexibility (indicated by a further reduction of unencumbered assets relative to unsecured liabilities) over the next 12 months could lead to a downgrade.

Fitch believes SFC is likely to maintain its asset quality in line with peers despite a slower economic environment in the next 12-18 months, supported by its prudent underwriting policies and concerted recovery efforts. Asset quality improved during FY12 on the back of high loan growth (64 % in FY12) and a 16.5 % reduction in the value of outstanding NPAs, amid a more conducive economic environment. However a slowing macroeconomic environment in H1FY13 has led to a 49 % increase in advances in arrears between three and six months.

The maturities of SFC's assets and liabilities are closely matched compared with peers, reducing refinancing and liquidity risks to a large extent, achieved by way of on-balance-sheet securitisations. However Fitch notes that over-reliance on such securitisations expose SFC to greater funding volatility and could limit its ability to expand its lending franchise to the level of unencumbered assets available on the balance sheet. Fitch expects the slowing credit cycle and rising market interest rates to pressure SFC's net interest margin and return on assets (ROA) over the 12 months to end-September 2013, as SFC funded most of its fixed-rate lending portfolio with variable rate borrowings.