Fitch affirms Siyapatha Finance at ‘BBB+’; Outlook stable

Tuesday, 30 April 2024 00:20 - - {{hitsCtrl.values.hits}}

Fitch Ratings has affirmed Siyapatha Finance PLC’s National Long-Term Rating at ‘BBB+(lka)’ with a Stable Outlook. Fitch also affirmed Siyapatha’s subordinated debt at’ BBB-(lka)’ and proposed senior debt at ‘BBB+(EXP)(lka)’.

Fitch issued the following drivers for its rating decision.

Shareholder Support Drives Ratings: Siyapatha’s rating is driven by our expectation that its parent, Sampath Bank PLC (A(lka)/Stable), would provide extraordinary support to Siyapatha, if required. Sampath’s ability to support its subsidiary is reflected in its rating and Siyaphtha’s relatively modest size. Our support assessment also considers Sampath’s full ownership of Siyapatha, record of equity support and combined branding.

Limited Subsidiary Role: Siyapatha is rated two notches below Sampath due to its limited importance to the group. Siyapatha mainly caters to retail and SME customers that are beyond the Sampath’s risk appetite and its core leasing business accounted for a modest 5.6% of group loans at end-2023. The company made up 2.9% of Sampath’s consolidated assets and contributed 4.2% to the group’s pre-tax profit. Siyapatha has significant management independence and limited operational integration with its parent bank.

Weak Standalone Profile: We assess Siyapatha’s standalone credit profile to be weaker than its support-driven rating, due to its moderate franchise, at 2.8% of sector assets, high risk appetite and weak financial profile. This is reflected by an above-industry gross non-performing loan ratio, moderate capital buffers and high leverage. Siyapatha’s pre-tax return on average assets marginally improved to 3.7% in 2023, from 3.4% in 2022, amid a gradual net interest margin recovery and lower impairment charges, but remains below the industry average.

Recovering Non-Performing Loan Ratio: We expect Siyapatha’s gross stage 3 loan ratio to further improve amid a pick-up in business activity and declining interest rates, which should support borrower repayment capacity and loan collections. The ratio stood at 19.3% at end-2023, down from 25.8% a year ago, but was still above the 17.8% sector average. The decline in non-performing loans was driven by Siyapatha’s sustained recovery efforts and improved economic indicators in the past few quarters relative to the stress in 2022 and 1H23.

Moderate Capital Buffers: Siyapatha’s regulatory capital ratios benefit from the lower risk weight of gold-backed lending, which accounts for around 20% of gross loans, but aggressive growth in non-gold products may exert some pressure. Siyapatha’s debt/tangible equity of 5.1x at end-2023 (end-2022: 5.5x) remained higher than the Fitch-rated peer average. The core capital ratio improved moderately to 17.1%, from 16.1% at end-2022, but was below the industry average of 21.2%.

Improved Financial Flexibility: We expect Siyapatha to maintain its funding mix and continue to benefit from the perceived shareholder support from Sampath. Increased deposit mobilisation efforts saw deposits reach 64% of total funding in 2023, up from 55% in 2022. An improved market liquidity also benefits the company’s access to wholesale term borrowings, similar to peers. As a result, financial flexibility has improved, with reduced reliance on secured wholesale borrowings.