Fitch says stronger parents, strategic roles drive finance companies’ subsidiary ratings

Tuesday, 23 July 2024 00:01 - - {{hitsCtrl.values.hits}}

“The majority of ratings on Sri Lankan finance subsidiaries are underpinned by the expectation of parental support,” says Fitch Ratings in a report.

“This often results in higher subsidiary ratings than that implied by their stand alone

Performance,” it added.

Fitch’s non-bank financial institution (NBFI) shareholder support framework considers the parent’s ability and propensity to support its subsidiary. It uses the parent’s rating as an anchor, and the subsidiary’s strategic positioning is often a key rating influence.

Fitch’s ratings on Sri Lankan shareholder support-driven finance and leasing companies (FLCs) reflect our view of their limited roles within their parent groups, considering their modest synergies and differing customer segments. “We view bank-supported FLCs as more strategically aligned with their parents, sharing similar business models and regulatory oversight,” Fitch said.

Corporate-supported FLCs exhibit varying degrees of strategic alignment and contribution to their parent’s business profiles. Indian NBFI-owned entities, in particular, tend to have more limited roles due to their separate jurisdictions.

Weakening parent credit profiles and expanding subsidiary size can limit parental ability to provide support – as seen in the rating downgrades of some Sri Lankan support-driven FLCs in recent years. Fitch would interpret capital shortfalls at an FLC subsidiary that lead to regulatory business limitations as indicating weaker parental support.

Fitch said it rates 12 out of 19 Sri Lankan FLCs based on expectations of support from stronger shareholders, including local banks, conglomerates, and foreign NBFIs. The remaining seven FLCs are rated based on their standalone credit profiles, including instances where Fitch deems the standalone profile to be at least as strong as the potential support from a parent. Fitch said it does not rate any Sri Lankan FLCs under our NBFI Government support framework.

The report, “Sri Lankan Support-Driven Finance and Leasing Companies – Peer Review 2024” is available at https://cdn.roxhillmedia.com/production/email/attachment/1640001_1650000/7995b9b396497f1991214c45c11c87dea8f6b608.pdf

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