Fitch affirms Singer Finance at ‘BBB+’; Outlook Stable

Fitch Ratings Lanka has affirmed Singer Finance (Lanka) PLC’s (SFL) National Long-Term rating at ‘BBB+(lka)’. The Outlook is Stable.

SFL’s rating reflects Fitch’s expectation that support, would be forthcoming from the parent, Singer (Sri Lanka) PLC (SSLP; ‘A(lka)’/Stable), given the strategic importance of SFL to SSLP. Strong linkages between the two entities are underlined by the sharing of the Singer brand, SSLP’s majority shareholding of 80.4%, board representation, and the financing by SFL of SSLP’s products.

Any changes in SSLP’s ability or propensity to extend support, as reflected in a change to SSLP’s rating, a material change in ownership of SFL, or a change in SFL’s strategic importance to SSLP, could trigger a rating action in SFL.

SSLP expects SFL to finance a greater share of its products over the medium-term after it raised its stake in the subsidiary to 80.4% from 75% by injecting Rs. 582.2 m of equity into SFL in 2012. Four out of SFL’s eight board seats are held by current SSLP officials and directors, including the chairman of SSLP and group chief executive officer.

In the past, SFL financed the entirety of SSLP’s locally manufactured products, which amounted to 15% of SFL’s advances in FY12 (financial year ending March). Since April 2012 SFL started financing sales from SSLP’s flagship Singer’s Mega stores. SFL currently finances six Singer Mega branches and intends to expand to 12 branches by end-December 2012.

SFL’s portfolio expanded 53% in FY12, driven by vehicle financing in the form of lease and hire purchase (79.1% of SFL’s portfolio).The remainder comprised mainly consumer finance through loans at 18.4% of SFL’s portfolio.

SFL’s non-performing loans (NPL) of over three months rose to 2.7% at H1FY13 (FYE12: 1.7%) while gross NPL ratio over six months remained below 0.5% during the same period, which was better than similarly rated peers. NPLs were made up largely of hire purchases and leases. The asset quality of consumer loans has been strong. Fitch expects SFL’s asset quality to compare favourably with that of the sector, due to strong credit monitoring and controls.

Lower net interest margins and high operating costs led to a fall in SFL’s profitability, as measured by pre tax returns on assets, to 5.1% in H1FY13 from 5.8% in FY12. Net interest margins tightened as a result of higher funding cost of 14.7% (FY12: 10.8%). Fitch expects NIM to improve along its expansion on consumer durable loans, where the yield is higher than vehicle finance.

SFL’s deposit base, the primary source of funding SFL (41.3% total assets), grew 14.3% in H1FY13. SSLP channelled Rs. 759 m in borrowing into SFL, which accounted for 42% of total borrowings at end-H1FY13.

Fitch expects capitalisation to decrease along with its expansion on the consumer durable portfolio. SFL’s equity to total asset ratio and capital adequacy ratio improved to 24.5% and 26.4% at end-H1FY13 from 16.4% and 17.4% respectively at FYE12, as a result of SSLP’s equity injection in July 2012.

SFL was formed in 2004 to support SSLP’s consumer finance business. SSLP is a leading retailer of consumer durables in Sri Lanka. SFL currently operates through nine branches and eight service centres.