Fitch affirms Senkadagala Finance at ‘BBB+’

Fitch Ratings Lanka said yesterday it has affirmed Senkadagala Finance Company PLC’s (SFC) National Long-Term rating at ‘BBB+(lka)’. The Outlook is Stable. The rating on SFC’s senior unsecured redeemable debentures of up to LKR 300m has also been affirmed at ‘BBB+(lka)’.

The ratings reflect SFC’s healthy asset quality, improved credit control systems, and long operating history of over 40 years. The ratings are, however, constrained by the company’s greater reliance on borrowings compared to peers and limited access to equity capital.

A rating upgrade is contingent upon the company diversifying its funding base, strengthening its capitalization and franchise while maintaining its asset quality and profitability. Deterioration in asset quality, or capitalisation or an increase in encumbered loans/ unsecured creditors, may lead to a rating downgrade.

Pre-tax return on assets (ROA) increased to 8% in the six months ended September 2011 (H112) from 7.0% in FY11, supported by realised capital gains on equity portfolio and recoveries on bad debts. Pre-tax ROA adjusted for capital gains was 7% at H112 (FY11: 6%).

Funding through borrowings formed 51% of assets in H112, which are largely on floating rate and pegged to the average weighted prime lending rate. Borrowings consist of securitization loans and debentures. Securitised loans were 73% of borrowings at end-September 2011 (end-March 2010: 57%) and have historically been higher than peers. Falling market interest rates since 2009 have led to funding costs declining continuously since FY10.

Net interest margins (NIMs) widened to 14% in FY11 from 11.9% in FY10 as existing low market interest rates resulted in a continuous decline in borrowing costs, with lending yields slower to follow as these are largely fixed for four years. NIMs narrowed to 10.2% in H1FY12 because yields caught up with declining funding costs as the company grew its loan book. Fitch expects NIMs to remain at current levels in view of the prevailing low market rates.

Loan book grew by 23% to LKR6.9bn at end-H112 (FY11: 24%). The company’s exposure to hire purchase facilities was higher than for leases at 58% and 40% of total loan book, respectively, in H1FY12. However, growth was more significant in the lease facilities, up 60% yoy at end-March 2011 and 84% yoy in H1FY12, due to the lowering of import tax on vehicles since mid-2010.

SFC’s asset quality compares well with peers. Three-month non-performing advances (NPAs) reduced to 4% at end-September 2011 (end-March 2010: 8.5%), while six-month NPAs remained at 1%. This is attributed to the improved macroeconomy, and its updated IT systems and new recovery procedures. Fitch believes that SFC would be able to maintain its asset quality in line with industry peers if growth continues at current levels.

At end-December 2010, SFC accounted for an approximate share of 3% of registered finance company assets in Sri Lanka. It operates through a network of 35 outlets and employs over 230 staff. The company was established in 1968 by the Balasuriya family, who owns 90% of SFC’s equity.