Fitch affirms Vallibel Finance at BB- (lka)
Fitch Ratings Lanka has revised Vallibel Finance Plc's (VFL) Outlook
to Negative from Stable. At the same time, the agency has affirmed VFL's
National Long-Term rating at ‘BB-(lka)'.
The revision of the Outlook reflects VFL's declining capitalisation,
as measured by its equity/assets ratio, and the deterioration in its
asset quality indicators as a result of rapid lending. The rating may be
downgraded if VFL is unable to stem the decline in these metrics,
resulting in a significant shift in its financial profile away from
similarly rated peers.
The Outlook may be revised to Stable if VFL is able to curtail the
increase in its non-performing loans (NPLs) through improved portfolio
monitoring, supported by new IT systems, and if core capitalisation
strengthens alongside slower loan expansion.
VFL's rating reflects its small but expanding asset base, its
moderate profitability and a developing franchise.
VFL's portfolio expanded strongly (79% in the financial year to March
2012), driven by lower import duties on vehicles and by branch
expansion. Consequently, its equity/assets ratio fell to 9.6% at
end-H113 (FYE12:10.3%; FYE11:12%). Loan growth slowed to 16% in H113 due
to a reduction in credit demand and an increase in import duties on
vehicles after March 31, 2012.
VFL's asset quality weakened, particularly for loans that are three
months overdue, with its gross NPL ratio rising to 14.1% at end-H113
(FYE12: 8.2%) due to the seasoning of its loan portfolio. Consequently,
its net three-month NPLs/equity ratio nearly doubled to 112.3% during
the same period. VFL's gross NPL ratio for loans that are six months
overdue also weakened to 2.4% from 1.7% during this period. Its net
six-month NPLs/equity ratio rose to 8.4% at end-H113 from 5.3% at FYE12.
VFL's pre-tax return on assets (ROA) fell to 6% (annualised) in H113
(FY12: 7.5%) due to reduced net interest margins (NIM) and higher
provisioning costs. NIM contracted in H113, as VFL's cost of funds
increased due to rising market interest rates. Given intense competition
for deposits, controlling funding costs will be a challenge for VFL.
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