Fitch Ratings has affirmed the National Long-Term Ratings of the following four Sri Lankan finance and leasing companies -
In addition, Fitch has maintained the 'BB-(lka)' rating on
AMWCL
AMWCL's National Long-Term Rating is driven by Fitch's expectation that its 90% parent,
Fitch sees the synergies between the two companies as high because a large share of AMWCL's advances are provided to clients to purchase AMW products. AMW set up AMWCL in 2006 with the objective of supporting its core business.
It sees AMWCL's intrinsic credit profile as being weaker than its support-driven rating due to its small franchise and weaker financial profile relative to similarly rated peers.
It mainly provides vehicle financing, with nearly a third of its leasing portfolio being to the two-wheeler sales of
Our assessment of
Ideal
Ideal's rating reflects its improved capitalisation following the introduction of new capital by an initial
This has strengthened the company's financial profile and bolstered its loss-absorption buffers against
The RWP reflects Fitch's belief that Ideal's rating could benefit from the change in shareholding and increased probability of support once MMFSL's effective control is established, in light of MMFSL's potentially stronger credit profile.
As part of this process, MMFSL will progressively invest
We believe the challenging operating conditions exacerbated by the pandemic have elevated funding and liquidity risks for Ideal. The company's financial flexibility in terms of unsecured debt/total debt remains low and its deposit base remains small and highly concentrated.
We expect Ideal's asset quality to be further weakened by the economic fallout from the pandemic. Its reported NPL ratio (greater than 180 days overdue) increased to 5.2% in FY20, from 3.2% in FY19, but was still below the average ratio for the sector.
Ideal's leverage in terms of debt/tangible equity has been supported by the capital infusions, but we expect it to increase in the medium-term as the company builds scale. Profitability, measured by pre-tax net income/average assets, dropped to 5.2% in FY20, from 6.0% in FY19, and is likely to remain under pressure due to rising credit costs.
Fintrex
Fintrex's rating reflects its weakened asset quality caused by its high risk appetite, which stems from its aggressive growth aspirations and evolving underwriting standards and risk controls. The rating also captures Fintrex's heavy reliance on secured funding and its small franchise.
Fitch estimates that Fintrex's six-month NPL ratio exceeded 20.0% in FY20, almost triple the reported 7.7% in FY19, due to a sharp accumulation of NPLs caused by the weak operating environment and a contraction of the loan book.
It sees further downside risk to Fintrex's weaker-than-the-sector asset quality in FY21 due to the economic fallout from the pandemic. The company's loan loss allowance only covers around 50%-53% of its NPLs, below its historical coverage ratio of 68% during FY16-FY19, exposing its equity to provisioning risk.
Fintrex's predominant use of secured wholesale borrowings will hamper its financial flexibility in distressed market conditions. The share of unsecured debt in its funding mix continued to decline alongside a contracting deposit base.
Fitch estimates this ratio was around 17% in FY20 - one of the lowest among Fitch-rated finance and leasing companies - reflecting the low share of deposits in its funding mix. It do not expect a significant change in Fintrex's funding profile in the medium term.
Fitch estimates that leverage, measured by debt/tangible assets, improved to around 2.8x in FY20, following a capital infusion of
It expects pressure on Fintrex's profitability, as measured by operating profit/average total assets, to extend into FY21 due to rising credit costs; it estimates that profitability plunged to around 1.0%-1.5% in FY20, from 4.0% in FY19, reflecting higher credit costs.
Bimputh
Bimputh's rating reflects its higher-than-peer leverage due to weak capitalisation and profitability, and increased pressure on funding conditions. The rating also captures its weakening asset quality, which Fitch believes could intensify in the current challenging operating environment.
The Negative Outlook reflects the possibility for further downside risk caused by the economic fallout from the pandemic, which is likely to exacerbate the capital impairment by further pressuring Bimputh's already-weak profitability, causing heightened risk to its funding profile.
Factors that could, individually or collectively, lead to positive rating action/upgrade,
AMWCL: An improvement in AMW's ability to provide support would most likely result in an upgrade. However, the deterioration in AMW's credit profile in the current environment makes such an improvement unlikely in the near term
Ideal: Fitch expects to resolve the RWP on completion of the phased increase in shareholding by MMFSL, when it has greater clarity on the linkages between Ideal and MMFSL and once it concludes its assessment of MMFSL's ability to provide support to Ideal. Fitch will maintain the RWP beyond the typical six-month horizon, with parental support likely to be factored into the rating once MMFSL has acquired effective control of Ideal. Fitch's view of support will include an assessment the level of strategic importance of the Sri Lankan market and Ideal to MMFSL, the extent of integration and branding. Fitch will remove the RWP if the investment is not completed. The rating would then remain driven by Ideal's intrinsic credit profile
Fintrex: Positive rating action appears unlikely in the near term in light of the ongoing macroeconomic pressures. Sustainable improvement in asset quality measures, mainly through better underwriting standards and risk controls, while maintaining acceptable capitalisation commensurate with Fintrex's risk profile would be positive for its rating. Over the longer term, a substantial strengthening of the scale and franchise of the business would support positive rating actions
Bimputh: Positive rating action appears unlikely in the near-term in light of the ongoing macroeconomic pressure and our expectation of further deterioration in the company's credit profile. In the longer term, an upgrade is contingent on a sustained improvement in Bimputh's credit metrics, especially its capital buffers, to be more commensurate with its risk appetite, stronger pre-impairment profit and better asset quality through an economic cycle. The Outlook would be revised to Stable if we assess that the downside risks to Bimputh's credit profile have abated, especially where there is structural improvement in profitability and normalisation of asset quality, reducing pressure on its capital buffers
Factors that could, individually or collectively, lead to negative rating action/downgrade,
AMWCL: A further weakening in AMW's credit standing, driven by its weakening performance, could lead to a reassessment of its ability to provide support to its subsidiary, and lead to a multiple notch downgrade on AMWCL. A decrease in AMW's propensity to provide support, likely due to a reduction in AMWCL's strategic importance or a significant dilution of AMW's shareholding, would also lead to a downgrade. The impact of any reduction in support on the national rating will be limited to two notches given the current assessment of the standalone strength of AMWCL
Ideal: Ideal's rating is driven by its standalone profile. Negative rating action could occur if a severe deterioration in the operating environment, beyond our base-case expectations, were to diminish the company's asset quality, profitability and capital adequacy, leading to downward pressure on Ideal's standalone profile
Fintrex: A significant reduction in loss absorption buffers owing to asset-quality slippage or further weakening in the funding and liquidity profile driven by the poor operating environment would pressure the rating
Bimputh: Further capital impairment due to sustained losses and weak asset quality coverage, in the absence of a material capital infusion, may trigger a multiple notch downgrade. The inability to raise new capital to meet regulatory requirements could also lead to operational and funding-access constraints that would be negative for the rating. A deposits cap of
© Pakistan Press International, source