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Fitch Affs Sri Lanka's TFC at 'BBB(lka)'; Revises Outlook to Negative Due to Weak Profitability
editor on 04 December, 2008 14:11:00 | 395 times read
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Fitch Ratings-Colombo/Mumbai/Singapore-04 December 2008: Fitch Ratings Lanka has today affirmed Sri Lanka's The Finance Company PLC's (TFC) 'BBB(lka)' National Long-term rating, and the 'BBB-(lka)' (BBB minus(lka)) rating of its subordinated debentures. The Outlook has been revised to Negative from Stable.TFC's rating factors in its significant market share and deposit franchise in the registered finance company (RFC) sector, whilst constrained by its low capitalisation, moderate profitability, and risks inherent to the real estate market. The revision of the Outlook to Negative reflects the company's deteriorating profitability on account of rising funding costs and the lack of a commensurate increase in real-estate related income. Fitch will continue to monitor the company's efforts toward improving yields, enhancing recoveries and generating greater liquidity from its real-estate assets, particularly in a challenging economic environment. TFC is the largest finance company in Sri Lanka, with a 25% share of sector assets at end-Dec 2007. Due to current macroeconomic conditions, TFC tightened lending criteria and has focused on recovery since FYE07. As such, TFC's portfolio growth was just 9% in FY08 (FY07:33%), while cash collection ratios improved to approximately 100% by September 2008 from 85% at April 2008 following the change in the recovery structure. TFC's portfolio mainly comprised of vehicle financing (leasing and hire purchase agreements (HPs)) and real estate financing which accounted for 55% and 35%, respectively, at FYE08; personal loans accounted for 10%. Real estate investments for sale and rent accounted for 18% of assets at FYE08. Consequent to lower loan growth and lower yields in overall real estate investments and land sales, profitability was significantly affected by the rising cost of funds and increased credit costs (provisions). As such, ROA declined to 1.9% at FY08 (H109: 0.4%) from 2.7% at FY07. While yields in HP and Leasing have increased, overall yields on land easy payments and land stock sales have failed to keep pace with the rising cost of funds over the last two years.Fitch defines NPLs as loans in arrears for over three months and as such, TFC's NPL/gross loans was high at 20.0% at H109 (FYE08: 17.7%) with the net NPL/equity ratio at 100% at H109 (FYE08: 89%). However, NPLs at the regulatory level of over six months/gross loans was 7.2% at H109 (FYE08: 6.0%) whilst the corresponding Net NPL/Equity ratio was 30% at H109 (FYE08: 23%). The latter ratio was high on account of 35% of NPLs having real estate collateral which did not attract any provisioning. However, even after adjustment for these NPLs, TFC's ratios were significantly above its peers. TFC has the largest time and savings deposit base among the RFCs and yoy growth was 31% in FYE08. These deposits accounted for 74% of funding at H109 and are re-priced annually. As such, TFC is exposed to high interest rate risks. Rate sensitive assets covered 51% of rate sensitive liabilities in the 'less than one year' category at FYE08 (FYE07: 52%). TFC's equity/assets ratio was 9.8% at H109 (FYE08: 10.4%), historically below peer averages. TFC is a listed registered finance company and is part of the Ceylinco Consolidated Group, with an asset base of LKR42.2Bn at H109 and a network of 46 branches. Established in 1940, TFC has primarily undertaken vehicle financing and property development financing.
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