Friday, 22 November 2013 07:06
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Fitch Ratings Lanka has affirmed Sri Lanka-based Senkadagala Finance Company PLC’s (SFC) National Long-Term Rating at ‘BBB+(lka)’ with a Stable Outlook. The agency also affirmed the rating on SFC’s outstanding senior unsecured redeemable debentures at ‘BBB+(lka)’ and assigned an expected rating of ‘BBB(lka)(EXP)’ to its proposed subordinated debenture of up to Rs. 1.25 b.
The proposed debenture issue is expected to have a tenor of five years, with a fixed-rate coupon. The issue will help improve the company’s Tier 2 capital position, and reduce its interest-rate risk. The final rating is subject to the receipt of final documentation conforming to information already received.
Key rating drivers
SFC’s rating reflects its satisfactory credit profile through economic cycles, supported by access to longer-term securitised borrowings and sound credit controls. Timely seizure of collateral on overdue loans enforces collection of outstanding payments and helps keeping loan deterioration in check. These positive factors are counterbalanced by its weaker deposit franchise and lower capitalisation compared to peers.
The proposed subordinated debenture is notched one down from SFC’s National Long-Term Rating to reflect their gone-concern loss-absorption quality in the event of a liquidation, in line with Fitch’s criteria for rating such securities.
There is pressure on SFC’s asset quality due to a slowing macroeconomic environment. Despite adequate risk monitoring, non-performing loans (including interest in suspense) increased by 58% over the 12 months ending June 2013 and amounted to 4.2% of gross loans at end-June 2013.
Capitalisation as measured by the Fitch core capital ratio (FCC) remained stable at 12.1% at end-September 2013 (11.9% at end-March 2013). The FCC ratio is derived from SFC’s balance-sheet equity and reflects provisioning in line with accounting standards.
The regulatory Tier 1 capital ratio deteriorated to 10.3% at end-September 2013 from 12% at end-September 2012 with the adoption of International Financial Reporting Standards. SFC has announced a rights issue for December 2013 and Fitch estimates that this would restore the regulatory Tier 1 ratio to about 12%, which is still below its peers’. The proposed subordinated debt would raise SFC’s total Capital Adequacy Ratio (CAR) to about 18%.
SFC’s assets and liabilities are better matched than peers’ as the company relies on securitised borrowings. Reliance on such wholesale borrowings explains SFC’s lower margins, and exposes it to greater funding volatility. Unencumbered assets stood at an acceptable 1.3x of unsecured liabilities at end-September 2013 (1.2x at end-March 2013). SFC’s deposit franchise remained weaker than peers, although deposits increased by 21.7% over 1H14 and funded 28% of total assets at end-1H14.
Fitch expects the slowing credit cycle to put pressure on SFC’s net interest margin and return on assets (ROA). The latter deteriorated to 3.3% in 1H14 (4.6% in the year ended March 2013), mainly due to higher provisioning costs and higher operating costs as newly established branches have yet to breakeven.
Rating sensitivities
An upgrade of SFC’s rating is contingent upon sustained stronger capital and a more robust deposit franchise that would allow the company to expand in a controlled manner. SFC’s rating could be downgraded if asset quality continues to weaken, leading to a material decline in capitalisation or excessive asset encumbrance.
