Thursday, 18 September 2014 00:00
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Fitch Ratings Lanka has affirmed Central Finance Company Plc’s (CF) National Long-Term Rating at ‘A+(lka)’ with a Stable Outlook. Fitch has also affirmed CF’s senior secured and senior unsecured debt at ‘A+(lka) and its subordinated debt at ‘A(lka)’.
Key rating drivers – national ratings and debt
CF’s rating reflects its strong capitalisation, which is supported by robust profitability and high profit retention. Counterbalancing these strengths are the pressure on loan quality and its low provisioning levels compared with its peers’. The rating also captures CF’s high margins, which are supported by the company’s strength in raising funds at relatively low rates through the solid franchise developed over a long operating history.
CF has historically maintained strong capitalisation. The regulatory reported Tier 1 capital ratio was 24.92x at end-June 2014 and the Fitch core capital (FCC) ratio was higher at around 40x. The FCC is higher because it captures the revaluation reserves, while the consolidated equity position and the balance sheet equity used are higher due to lower loan impairment charges that are in line with international accounting rules.
CF’s asset quality continued to be under pressure, with its regulatory non-performing loans (loans overdue by six months or more) increasing to 3.8% at end-June 2014 from 2.45% at end-June 2013. This was due to a slowing macroeconomic environment and the company’s exposure to the agricultural sector, which has been adversely affected by unfavourable weather conditions.
The regulatory non-performing loans (including interest in suspense) increased by 46% in the financial year ended 31 March 2014 (FY14) and by 18% in 1Q15. The ratio of impairment reserves to gross loans increased to 1.3% at end-June 2014 from 1.0% three months earlier. This is still low compared to peers and implies a lower provisioning coverage.
The company has sufficient unutilised credit lines to fund its maturity mismatches. CF’s well-established deposit franchise supports liquidity. Customer deposits funded about 50% of CF’s assets and were fairly granular with 88% of loan contracts being for loans under Rs. 1 m ($ 7,700) at 1Q15.
CF’s senior unsecured debentures are rated in line with CF’s National Long-Term Rating of ‘A+(lka)’ as they constitute unsecured and unsubordinated obligations of the company.
The senior secured debentures, which are secured by a primary mortgage over receivables from identified hire-purchase and lease agreements, are also rated in line with CF’s National Long-Term Rating. There is no rating uplift for the collateralisation as the note’s recovery prospects are assessed to be average and comparable with those of the unsecured notes in a developing legal system.
The subordinated debentures are rated one notch below CF’s National Long-Term Rating of to reflect their subordination to senior unsecured creditors.
Rating sensitivities – national ratings and debt
Greater product diversity, together with improved funding flexibility commensurate with higher-rated peers, could lead to an upgrade. However, taking into account the current pressure on its asset quality, Fitch does not see an upgrade as likely in the medium term.
CF’s rating could be downgraded if it is not able to provide a buffer against further loan quality deterioration through profit, which would lead to an increase in unprovided NPLs relative to equity.
The debt ratings will move in tandem with CF’s National Long-Term Rating.
CF is a Licensed Finance Company established in 1957. It is 22.6% held by the Wijenaike family, the founders of the company, 16.1% owned by Corporate Services Ltd., and the rest is publicly held. The company’s lending portfolio consists largely of vehicle financing.
