Fitch affirms Vallibel Finance at ‘BB-’/Stable

Fitch Ratings has affirmed Sri Lanka’s Vallibel Finance PLC’s (VFL) National Long-Term rating at ‘BB-(lka)’. The Outlook is Stable.

VFL’s rating factors in its small but growing asset base, healthy profitability and modest asset quality. The rating is constrained by VFL’s modest capitalisation which is lower than the Fitch-rated RFC (registered finance company) average of 17.7% at end-March 2011 (FYE11).

Sustained improvements in capitalisation while maintaining asset quality and profitability following its growth phase may lead to a rating upgrade. A further dilution in capitalisation below that of its rating peers could lead to a downgrade of VFL’s rating.

VFL’s equity/assets fell to 12.0% in FYE11 and to 10.8% in H112 (FYE10: 14.82%) due to rapid loan growth. Total advances increased by 39% in H112 (FY11: 110%) albeit on a small base. This was similar to that of the sector which benefited from the reduction of import duties in mid-2010. Fitch notes, however, that VFL would need to strengthen its core capital base in view of current growth trends which have surpassed the company’s rate of internal capital generation.

The finance company’s three-month gross non-performing loans (NPLs) ratio fell to 7.2% in H112 from 12.5% at FYE10, helped largely by loan growth. Regulatory six-month NPLs increased marginally to 1.7% in H112 (FYE11: 1.5%, FYE10: 3.2%), but compares well with similar-rated peers. Fitch notes, however, that NPLs could increase as VFL’s loan book seasons.  An improving trend in profitability since FYE10 continues with return on assets further increasing to 4.8% in H112 (FY10: 3.6%), supported by wider net interest margins (NIMs), falling provisioning costs and higher non-interest income. NIMs benefited from deposit rates falling faster than lending rates in FY11. However, funding costs are likely to increase in H212 as competition for deposits intensifies; although this may be cushioned by VFL’s expanding branch network which will give it better access for deposit mobilization.

VFL’s deposit growth of 29% in H112 (FYE11: 128%) was higher than that of the sector and supported by branch expansion during the year and competitive market rates offered in relation to peers.

The finance company’s loan-loss coverage is lower than the sector’s, and stems from a proportionate reduction in over 12-month NPLs, which require 100% provisioning as per the regulatory requirements. Un-provisioned NPLs accounted for 50.7% of VFL’s capital base at end-H112 - weakening from 42% at FYE11 (FYE10: 60%). However, at the regulatory six-month threshold, this was significantly lower at 5.4% (FYE11: 1.6 %).

VFL is a registered finance company with an asset base of LKR5.2bn at end-September 2011. The company operates nine outlets in Sri Lanka.