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.

In addition to sharing the Singer brand, SSLP’s 75% shareholding in SFL, and board level linkages, SFL provides financing for SSLP’s locally manufactured products (SLMP). Changes to the implied support to SFL from SSLP or in the strategic importance of SFL to its SSLP could trigger a rating action.

SFL’s portfolio expanded strongly by 23% in H112 supported by an increase in vehicle finance, and Fitch expects this trend to continue. Consequently, leases and hire purchase (HP) together accounted for about 70% of SFL’s portfolio in H112 and is likely to account for the majority of lending in future.

Consumer finance through loans comprised the remainder. This includes loans for SLMP that accounted for 26% of the portfolio in H112. The SLMP portfolio is managed by SSLP for a fee; the asset quality of this portfolio has been strong, with a gross non-performing loan ratio (NPL) ratio of below 1% at FYE11.

SFL’s gross NPL ratio stood at 2.5% at H112 and 2.2% at FYE11, and the gross NPL ratio at the regulatory six-month threshold remained under 0.5% at H112 and FYE11. While NPLs comprised largely HP and leases, the NPL ratio on SFL’s vehicle financing portfolio (3.4% at FYE11) still compared well with most larger peers’.

SFL’s profitability as measured by pre-provisioning return on assets (ROA) decreased to 6.3% (annualised) in H112 from 6.7% in FY11 largely due to a contraction in net interest margins (NIMs) to 16.0% from 17.7%. The contraction in NIMs reflected the shift in SFL’s portfolio composition, with yields on leases and HPs being lower than yields on loans.

Reduced effective taxes supported an increase in SFL’s ROA to 3.9% (annualised) in H112 from 2.9% in FY11, although profitability remained below that of larger peers. SFL’s cost structures remained high compared to peers due to substantial fees and commissions (55% of operating costs in H112) paid to SSLP for managing the SLMP portfolio.

Deposits continue to be the main source of funding for SFL (47% at H112) and comprise entirely fixed deposits. Funding channelled from SSLP finances the SLMP portfolio.

Stemming from regulatory requirements applicable to registered finance companies, SFL was listed on the Colombo Stock Exchange in January 2011. The issuance of 25% of SFL’s share capital through an initial public offering doubled its share capital to Rs. 800 m. This boosted SFL’s capital adequacy and equity/assets ratios to 22.6% and 21.1%, respectively, at FYE11, from 16.3% and 14.3% in FY10.

While equity/assets ratio remained strong in H112 (18%), strong asset expansion may dilute capitalisation. Further, SFL’s internal capital generation continues to be constrained by high operating costs. Hence, a further capital infusion may be needed.

SFL was formed in 2004 to support SSLP’s consumer finance business. SSLP is a leading retailer of consumer durables in Sri Lanka. It has eight branches and eight service centres, with seven service centres based in SSLP’s stores.