ICRA Lanka reaffirms ratings of Citizens Development Business Finance PLC

ICRA Lanka Ltd., subsidiary of ICRA Ltd. – a group company of Moody’s Investors Service – has reaffirmed the issuer rating of Citizens Development Business Finance PLC (CDB or the company) at [SL]BBB+ (pronounced SL triple B plus). 

The outlook on the rating continues to be Negative. ICRA Lanka has also reaffirmed the issue ratings of [SL]BBB (pronounced SL triple B) with Negative outlook for the Rs. 2,000 million, Rs. 1,075 million and Rs. 928 million subordinated, unsecured, and listed redeemable debentures programs of the company.

Further, ICRA Lanka has reaffirmed the [SL]A-(SO) (pronounced SL A minus structured obligation) rating with Stable outlook for the Rs. 1,000 million subordinated guaranteed listed redeemable debentures of the company, guaranteed by Seylan Bank PLC (Seylan). The rating for the subordinated guaranteed redeemable debentures program is based on the strength of the unconditional and irrevocable guarantee from Seylan Bank PLC (Seylan) covering the principal and two interest instalments (semi-annual) of the rated issue. 

The guarantor undertakes the obligation to pay, on demand from the trustee, the total principal sum of Rs. 1,000 million and, two half-yearly interest instalments of the proposed redeemable debentures. The rating also assumes that the guarantee will be duly invoked by the trustee, as per the terms of the underlying trust deed and guarantee agreement, in case there is a default in payment by CDB.

The ratings factor in CDB’s established track record, experienced senior management team, and exposure to relatively less risky asset classes. 

The ratings factor in the improvement in the capital profile, with the  Tier 1 and Total capital adequacy ratios (CAR) standing at 9.46% and 13.41% in December 2019 vis-à-vis 8.09% and 11.07%, respectively, in March 2019; same is above the regulatory thresholds of 6.50% and 10.50%. CDB’s gearing (adjusted for revaluation reserve) improved to 7.6 times in December 2019, compared with 9.5 times in March 2019, largely due to the equity infusion of about Rs. 1 billion in June 2019 via a rights issue program. Further, the company was able to secure Tier 2 capital in 9M FY2020, via debenture issues amounting to Rs. 928 million and Rs. 1,075 million. 

However, the ratings note the moderation in profitability, largely due to increasing credit costs; RoE and RoA stood at 13.8% and 1.5% in 9M FY2020, compared with 21.6% and 2.1%, respectively, in FY2019 (20.9% and 2.2% in FY2018). CDB’s gross NPA ratio (GNPA%) increased to 7.5% as of December 2019 vis-à-vis 6.7% in March 2019 (3.1% as of March 2018), while delinquencies in the 90+ day past due (dpd) increased to 19.7% vis-à-vis 15.3% (11.2% as of March 2018), due to ongoing macro challenges. Excluding repossessed assets, the NPA stood at 5.4% as of December 2019, compared with 4.1% in March 2019 (2% in March 2018).

ICRA Lanka further takes cognizance of the company’s sizable asset liability mismatches in the short-term because of the dependence on short-term public deposits.  Nonetheless, the availability of unutilized funding of about Rs. 14 billion provide comfort from a liquidity perspective. Going forward, the company’s ability to maintain a comfortable risk adjusted capital profile to support portfolio growth, and ability to improve its asset quality and earnings profile would be crucial from a ratings perspective.

The outlook may be revised to “Stable” based on CDB’s ability to improve its asset quality profile while achieving healthy profitability indicators and capitalization. The ratings may be downgraded in case of further deterioration in the asset quality indicators leading to weakening in the earnings profile from current levels, or in case  the company is unable maintain sufficient capital to support the envisaged portfolio growth.