RAM Ratings Lanka reaffirms LB Finance’s A-/P2 ratings

RAM Ratings Lanka has reaffirmed LB Finance PLC’s (LBF or the company) respective long- and short-term financial institution ratings at A- and P2. Concurrently, its following issue ratings have been assigned and reaffirmed. All the ratings have a stable outlook.

Meanwhile, RAM Ratings has withdrawn the P2 rating of the company’s Rs. 250 million Commercial Papers Program (2011/ 2012) upon redemption of the issue. Upon the non-issuance of the Rs. 1.10 billion Senior Secured Notes (2011/2014), the company had requested a withdrawal of the issue ratings. As such, RAM Ratings Lanka no longer has any rating obligation on the said facility.



The ratings are upheld by LBF’s strong market position among licensed finance companies (LFC) in Sri Lanka, its strong franchise, healthy asset quality and good performance. On the other hand, the ratings are tempered by the lack of a seasoned loan portfolio following aggressive loan growth.

RAM Ratings deems the company’s asset quality to be healthy. LBF has continued to maintain its focus on segments such as three-wheeler financing that result in relatively low delinquency rates and gold loans that are fully backed by easily liquefiable gold.



This coupled with good underwriting and recovery measures resulted in the company’s nonperforming loans (NPLs) increasing only slightly (8.45% year-on-year) in FYE 31 March 2012 and 5.05% in 1Q FY Mar 2013, despite rapid loan growth (52.37% year-on-year and 24.60% annualised in FY Mar 2012 and 1Q FY Mar 2013).



RAM Ratings notes that this is against a backdrop of several LFC peers demonstrating weaker asset quality subsequent to rapid loan growth. Also, LBF’s gross NPL ratio of 2.42% as at end-FY Mar 2012 was in line with similarly-rated peers’, remaining largely unchanged as at end-June 2012. These aside, the company’s unseasoned loan portfolio remains a concern following the aggressive loan growth.



LBF’s financial performance is deemed good. Although its financial indicators compare better than most of its similarly-rated peers, the company’s net interest margin (NIM) has thinned in a rising interest-rate scenario where short-term deposits re-priced faster than relatively long-term loans; this is observed throughout the industry. Meanwhile, its cost-to-income ratio is still better than peers.

All in all, LBF recorded a pre-tax profit of Rs. 2.35 billion in FY Mar 2012 compared to Rs. 1.67 billion the previous year. Looking ahead, RAM Ratings expects the company’s financial performance to moderate, with relatively slower loan growth, yet remain better than peers.



LBF’s funding is viewed to be good. Its franchise is stronger than that of most LFC peers; this coupled with its extensive branch network has allowed it to retain the largest deposit base among LFCs as at end-March 2012. However, the company increased its exposure to borrowings in fiscal 2012 to aid loan growth, which resulted in a high loans-to-deposits (LD) ratio of 139.87%; the ratio improved to 128.45% by end-June 2012.

LBF’s liquidity is viewed as average, with its statutory liquid-asset ratio clocking in at 10.95% as at end-March 2012, and improving to 11.63% as at end-June 2012, in line with similarly-rated peers. The company also has adequate unutilised funding lines. LBF’s capitalisation levels are adequate.

The company’s tier -1 and overall risk-weighted capital adequacy ratios (RWCAR) clocked in at 12.58% and 14.86%, respectively as at end-FY March 2012, still in line with those of similarly-rated peers. The company’s internal capital generation remained strong at 35.54% in the first three months of fiscal 2013, however down from fiscal 2012 due to slower loan growth. RAM Ratings opines that LBF’s current capitalisation levels are adequate to meet planned loan growth.