Abans Finance at ‘BB+(lka)’; Outlook Stable
Fitch Ratings Lanka has affirmed Abans Finance PLC’s National Long-Term Rating at ‘BB+(lka)’. The Outlook is Stable.
The affirmation reflects Fitch’s view that support would be forthcoming from the parent, Abans PLC (BBB+(lka)/Stable), if needed. Our expectation stems from Abans being the largest shareholder in Abans Finance, the parent’s involvement in strategic decisions through board representation and a common brand name.
Abans Finance is rated three notches below its parent because of its limited contribution to the group’s core businesses. The company financed less than 1% of Abans’ consumer durables revenue in the financial year ending March 2019 (FY19). It mainly provides vehicle financing, with 47% of its lending channelled through the sale of two-wheelers by Abans Auto (Pvt) Limited, a company owned by Abans’ shareholders but positioned outside of the Abans group. Abans Finance only contributed 5% of group revenue and 7% of group operating profit in FY19.
Our assessment of Abans Finance’s limited importance also incorporates its parent’s decreasing shareholding, which has fallen to 50%, from 89%, following capital infusions into Abans Finance (FY18: Rs. 277 million, FY17: Rs. 462 million) coming mostly via its private-equity investor.
Fitch believes earning retention alone will be insufficient to achieve the regulatory minimum capital requirements of Rs. 2 billion by end-2019 and Rs. 2.5 billion by end-2020. In January 2019, the Central Bank of Sri Lanka had imposed a temporary cap on Abans Finance’s deposit base.
Abans Finance’s intrinsic financial strength is significantly weaker than its support-driven rating due to its small franchise, limited operating history and high-risk appetite.
AMW Capital Leasing and Finance - ‘BBB+(lka)’; Outlook Stable
Fitch Ratings Lanka has affirmed AMW Capital Leasing And Finance PLC’s (AMWCL) National Long-Term Rating at ‘BBB+(lka)’. The Outlook is Stable.
AMWCL’s rating reflects Fitch’s expectation that support would be forthcoming from Associated Motorways Private Limited (AMW), which owns 90% of AMWCL, in light of the finance company’s strategic importance to its parent, a large importer of motor vehicles in Sri Lanka. This is based on AMWCL’s role in the group, the common AMW brand and reputational risk for AMW if AMWCL defaulted.
Fitch sees the synergies between the two companies as high, since almost half of AMWCL’s advances comprise facilities that are provided to clients who purchase AMW products. AMW set up AMWCL in 2006 with the objective of supporting its core business. AMW is involved in the strategic direction of AMWCL through board representation. AMWCL has nine of its 22 branches based within AMW branches.
AMWCL’s rating is sensitive to changes in Fitch’s assessment of its parent’s ability and propensity to provide support, none of which Fitch expects to change significantly in the short to medium term.
Fintrex Finance at ‘B(lka)’; Outlook Stable
Fitch Ratings Lanka has affirmed Fintrex Finance Limited’s National Long-Term Rating at ‘B(lka)’. The Outlook is Stable.
Fintrex’s rating reflects its high risk appetite, which stems from its large exposure to the riskier segment of the finance and leasing market, evolving underwriting standards and risk controls, and aggressive growth aspirations. The rating also captures Fintrex’s modest capital base, heavy reliance of secured funding and its small franchise.
Fintrex is likely to experience more asset-quality pressures in the medium-term in light of its aggressive loan growth in the financial year ended March 2019 (FY19), against the backdrop of a weak operating environment due to an economic slowdown. Fintrex’s reported non-performing loan ratio (greater than 180 days overdue) increased sharply - a trend across the finance and leasing sector - to 7.7% in FY19 (FY18: 5.7%).
We regard Fintrex’s absolute capital base as small, but we expect Fintrex will receive additional capital from its main shareholder - Bluestone1 Private Limited - to meet the enhanced minimum capital requirement of Rs. 2.5 billion by 1 January 2021. We estimate that Fintrex would require at least another Rs. 1 billion and its internal capital generation is unlikely to be sufficient to meet the threshold.
The company’s debt/tangible equity ratio of 4.1x at end-FY19 remained better than similar-rated peers. Still, the ratio could increase in the medium-term as the company executes its ambitious expansion.
Fintrex’s pre-tax net income/average assets ratio of 4.0% at end-FY19 was lower than better-rated peers, but has improved over the last few years as interest margins widened. However, profitability could come under pressure from rising credit costs through asset-quality pressures.
Downgrades Bimputh Finance to ‘BB-(lka)’; Outlook Stable
Fitch Ratings Lanka has downgraded Bimputh Finance PLC’s National Long-Term Rating to ‘BB-(lka)’ from ‘BB(lka). The Outlook is Stable.
The downgrade stems from a sharp deterioration in Bimputh’s capital position, which we believe is no longer commensurate with its high-risk appetite. This is due to the significant decline in asset quality and sustained fall in pre-impairment operating profitability.
Bimputh’s rating reflects its high-risk appetite stemming from its substantial exposure to microfinancing and SME lending, which tends to be more vulnerable to economic conditions.
The rating also captures Bimputh’s weakened capital buffers, despite our expectation of capital infusions in line with regulatory requirements. Bimputh’s regulatory core capital has fallen below the interim minimum threshold of Rs. 1.5 billion, which applied from 1 January 2019. Bimputh will need at least another Rs. 1.35 billion in additional equity capital to meet the Sri Lankan regulator’s enhanced capital requirement of Rs. 2.5 billion by January 1, 2021, and its internal capital generation is unlikely to be sufficient to meet the threshold. In addition, its share of uprovisioned non-performing loans (NPL) has increased, further pressuring its capitalisation.
Bimputh’s reported six-month regulatory gross NPL ratio deteriorated sharply to 16.8% in the financial year ending March 2019 (FY19) (FY18: 6.4%) and is now significantly higher than the sector’s 7.7%. Furthermore, the company has already charged-off 10.8% of its average gross loans in last two years (FY19: 5.1%; FY18: 5.7%).
The Central Bank of Sri Lanka has imposed regulatory sanctions on Bimputh by way of a deposit cap of Rs. 2.2 billion due to its non-compliance with interim minimum capital requirement.