RAM Ratings assigns long term rating of ‘BBB-’ for CDB

RAM Ratings Lanka assigned the respective long- and short-term financial institution ratings of Citizens Development Business Finance Limited, at BBB- and P3; the long-term rating has a stable outlook.

The Company’s ratings are upheld by its improving performance and healthy asset quality. Nonetheless, the ratings are pressured by its marginal capital cushioning.

CDB had operated as a specialised leasing company from 1995 until May 2009, when it obtained a registered finance company licence. It is now a medium-sized RFC, accounting for 4.07% of the industry’s assets as at end-September 2010.

The Company, formerly known as Ceylinco Development Bank Ltd, had reinvented itself as Citizens Development Business Finance Ltd amid the crisis that had brought down the Ceylinco Consolidated Group (‘Ceylinco’).

Concurrently, the Company had made changes to its board by bringing in new independent members, in a bid to overcome the confidence crisis. Its recent listing on the Colombo Stock Exchange (CSE) has further improved the transparency of its disclosures.

CDB had aggressively expanded its loan portfolio to Rs. 6.60 billion as at end-October 2010, from Rs. 5.29 billion as at end-FYE 31 March 2010. This had followed its efforts to expand its loan books after having curtailed lending in fiscal 2009 due to the weak economic situation then.

The expansion had been achieved through CDB’s network of 30 branches and two service centres, with a focus on three-wheeler leases. Simultaneously, the Company had strengthened its monitoring and recovery procedures, which had in turn reduced the level of its non-performing loans to Rs. 330.77 million (end-FY Mar 2010: Rs. 396.29 million).

As such, CDB’s gross NPL ratio ameliorated to 5.01% as at end-October 2010 (end-March 2010: 7.49%). We also note that the Company’s credit quality has remained better than that of its similar-sized peers.

Meanwhile, CDB’s financial performance improved in the first 7 months of FY Mar 2011, supported by better net interest income arising from its expanding loan books, reduced provisioning and mark-to-market gains on its short-term investments.

Accordingly, the Company’s net interest margin widened to 9.89% (FY Mar 2010: 7.17%). At the same time, its cost-to-income ratio eased to 56.51%, well below the industry average of 70.03%. As such, CDB’s return on assets and return on equity clocked in at 6.27% and 64.50% as at end-October 2010, better than the corresponding industry averages of 2.68% and 24.06%.

The Company’s statutory liquid-asset ratio stood at 11.36% as at end-October 2010 (end-FY Mar 2010: 17.60%), a result of its augmenting deposit base. That said, the ratio is still above the regulatory minimum of 10%. The Company’s funding base was dominated by customer deposits, which accounted for 82.00% of its financing needs as at end-October 2010.

Although CDB’s ratings are constrained by its marginal capital cushioning, it has still managed to comply with the minimum regulatory capital requirement. Its overall risk-weighted capital adequacy ratio improved to 10.38% as at end-October 2010 (end-FY Mar 2010: 9.17%), on the back of more robust internal capital generation; this is also above the regulatory minimum of 10%. RAM Ratings Lanka expects CDB’s capitalisation to strengthen further as its profitability improves.