Fitch affirms Multi Finance at ‘B+’, Stable

Fitch Ratings Lanka has affirmed Multi Finance PLC’s (MFP) National Long-Term rating at ‘B+(lka)’ with a Stable Outlook. The agency has also affirmed and withdrawn the ‘B(lka)’ rating on MFP’s proposed subordinated debenture issue of up to LKR100m, as the issue did not proceed as previously envisaged.

The ratings reflect MFP’s small size (asset base of LKR990m at end-2011) relative to local sector peers and small franchise. The ratings also reflect the company’s recent rapid loan growth, modest asset quality relative to local peers, and comfortable capitalisation in relation to its operations.

The ratings may be downgraded upon a significant or sustained weakening in liquidity and/or capitalisation due to either aggressive loan growth or up streaming of cash flows. Conversely, an increase in MFP’s scale of operations without a significant compromise on asset quality or capitalisation could result in an upgrade of its ratings.

MFP’s rapid loan growth of 43% in 9MFY12 (FY11: 70%) was in line with the local finance company (LFC) sector. The growth stemmed from lease and hire purchase segments and was helped by lower import duties on vehicles in 2010-2011. Asset quality remained high at end-9MFY12, with a three-month non-performing loan (NPL) ratio flat at 3.9% and a six-month regulatory threshold of 0.4% (FY11: 1.2%), which compares well with other Fitch-rated LFCs (5.9% and 2.9%, respectively, at end-H1FY12). However, with rising interest rates and increasing external pressures on th e domestic economy, MFP’s unseasoned loan book is likely to face asset quality stresses unless strong monitoring and controls measures are maintained on new disbursements.

MFP diversified its funding sources at end-9MFY12 (nine months ended December 2011) with deposit funding increasing to 32% of assets from 22% at end-FY11 (sector: 65%). However, this has significantly increased deposit concentration in relation to peers, with the 10 largest depositors accounting for 43% of total deposits at end-9MFY12 (FY11: 15.7%).

Fitch notes that this could place pressure on liquidity in the event of large withdrawals. In July 2011, LKR157m of the parent company’s borrowings were converted to equity, resulting in MFP’s equity/assets improving to 44.9% at end-9MFY12 (end-FY11: 41.1%). However, Fitch cautions that if such equity infusions are debt funded at the holding company level, there may be pressure to upstream cash flows which could weaken MFP’s current high level of capitalisation (Tier 1 capital adequacy ratio: 40.15% in 9MFY12).

Core profitability was sustained in 9MFY12, as the company was able to control credit costs through managing asset quality and also as new branches started to generate income thereby improving cost structures. Net interest margins (9MFY12: 14.6%, FY11: 19.1%) are in line with peers and benefit from a higher proportion of equity-funded assets, and as such could narrow as equity/assets decreases. Fitch notes that given tightening market liquidity conditions and the intense competition for deposits, controlling funding costs will be challenging for MFP.

MFP is an LFC, 85% owned by Entrust Limited (Entrust). The latter is an investment holding company and has other subsidiaries: Entrust Investments Limited and Entrust Securities PLC. Entrust is 99.9% held by Pacific Trust (Private) Limited.