Fitch Affirms Trade Finance & Investments at ‘BB+(lka)’; Outlook Stable

FITCH Ratings Lanka has today affirmed Trade Finance & Investments Ltd’s (TFI) National Long-term rating at ‘BB+(lka)’. The Outlook is Stable.

TFI’s rating factors in its high capitalisation in terms of its size of operations and good profitability. The rating is constrained by TFI’s small asset base, limited product diversity, and narrow funding base.

The rating could be upgraded if TFI increases market share in its core operations significantly relative to its peers whilst maintaining good asset quality and profitability indicators. Conversely, the rating would be downgraded if there is a substantial weakening of TFI’s asset quality and profitability.

TFI has been in operation for over 30 years, and has established a franchise in financing (lease and hire purchase) mainly three-wheelers (also called auto-rickshaws). Three-wheelers accounted for approximately 70% of assets financed in the six-month period ended September 2010 (H111).

In 2007, due to emission concerns, the government of Sri Lanka (GOSL) imposed a ban on the import of two-stroke three-wheelers with effect from early 2008, with a further ban on spare part imports from 2011 (for some components after 2013). Fitch expects the demand for two-strokes to ultimately decline, and be replaced by the four-stroke product.  TFI has curtailed lending to two-stroke three-wheelers, with much of the incremental loans coming from four-stroke three wheelers and loans disbursed from its new branch in Jaffna (approximately 11% of loan book at H111).   Historically, advances in arrears at the three-month level have been high, with NPLs/loans of 22% at end-H111, reflecting the risk profile of the clientele and the company’s business strategy.

However, TFI has consistently maintained its six-month NPLs/gross loans in the 6%-8% range over the last five years. Its six-month NPL/loans ratio was 6.8% at H111 (FY10: 7.1%) and net NPL/equity ratio was good at 13% at end-H111 (1.7% for six-month NPLs), which was significantly better than the sector average.

TFI’s funding is predominantly from equity, deposits and loans from its shareholders and related parties. The company’s equity/assets ratio was 56.5% at end-H111, which was significantly above the sector average. Its internal capital generation was robust, in light of good profitability (net interest margins were 18.8% for H111, 22.5% at FY10) and high earnings retention policy.

All registered finance companies are required to be listed by June 2011, as such TFI is planning a listing on the Colombo Stock Exchange for at least 10% of voting shares in the last quarter of FY11. Equity proceeds from the listing would be utilised for additional branch expansion and loan growth.

TFI is a finance company established in 1978. The Cooray family (owners of the Jetwing Group) acquired TFI in the early 1990s, and currently own around 93%.