Tuesday, 16 July 2013 01:02
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RAM Ratings Lanka has reaffirmed Softlogic Finance PLC’s (SLF) respective long- and short-term financial institution ratings of BBB- and P3. They have also withdrawn the BBB- ratings of the company’s Rs. 500 million Redeemable Senior Debentures (2012/2014) and Rs. 200 million Unsecured Commercial Papers (2012/2013) upon the redeemed facility. Concurrently, a long- and short term ratings of BBB- and P3 have been assigned to SLF’s proposed Rs. 500 million Listed Senior Unsecured Redeemable Debentures (2013/2016), and a short-term rating of P3 to the company’s proposed Rs. 200 million Unsecured Commercial Papers (2013/2014).
The long-term ratings carry a stable outlook. The financial institution and issue ratings are supported by the company’s moderate capitalisation levels and adequate liquidity, albeit tempered by its weakening credit quality and relatively high cost profile. The ratings may come under pressure if SLF’s credit quality deteriorates any further. We will closely monitor developments in this regard.
SLF is a medium-sized licensed finance company (LFC), with 2.20% of total industry assets as at end-December 2012. It has grown aggressively since 2010, subsequent to coming under Softlogic Holdings PLC (SLH), a conglomerate with diversified business interests.
Increased delinquencies from the company’s portfolio, which is concentrated in commercial vehicle financing makes it more susceptible to changes in macro-economic conditions and business cycles. This coupled with underwriting standards in respect of its personal loan portfolio has rendered SLF’s credit quality week. The company’s weaker gross non-performing loans (NPLs) coverage exacerbates the deterioration in its asset quality, weaker than similar rated peers. Although SLF’s gross NPL ratio was in line with those of its peers, its gross NPLs had surged 4-fold to Rs. 228.22 million (inclusive of repossessed stock) by end-March 2013 (end-March 2012: Rs. 49.70) and gross NPL ratio was at 2.28% as at end-March 2013 (end- March 2012: 0.61%) as seasoning took effect amid less favourable macro-economic conditions. A substantial increase in new NPLs, mainly from hire-purchase (HP) leasing, personal and share loans resulted in the increased delinquency rates of these segments. In light of the upward trend in NPLs, the Company had curtailed personal loans, and discontinued consumer and share loans. However, RAM Ratings Lanka remains concerned about the steep increase in NPLs.
Meanwhile, SLF’s performance is deemed average. Although weighed down by the company’s weaker-than-peer cost-to-income ratio and Return-On-Assets (ROA), performance was upheld by its Net Interest Margin (“NIM”), which was on par with similar-rated peers. Going forward, performance is expected to moderate, given the company’s high cost profile and the gradual up tick in demand for credit. SLF’s NIM declined to 8.74% in 31 FYE March 2013 (FY Mar 2013) (FY Mar 2012: 10.90%) as deposits re-priced faster amid higher interest rates and the channelling of some of the company’s funds to low-yielding government securities. SLF’s pre-tax profit came in at Rs. 200.91 million in FY Mar 2013, translating into an ROA of 1.72% (FY Mar 2012: 2.23%).
SLF’s funding mix remained relatively unchanged as at end-March 2013, with customer deposits making up the bulk of the composition. Despite a long-term loan from the FMO (International Development Bank of Netherlands), obtained in FY Mar 2013, the company’s loan to deposit ratio improved from 176.51% as at end-FY Mar 2012 to 162.40%, albeit standing on par with peers.
SLF’s liquidity is deemed adequate. Its statutory liquid asset ratio increased to 23.01% as at end-March 2013 from 22.47% as at end-March 2012 amid slower loan growth, comparing better to that of its peers. Elsewhere, the negative gap in the company’s asset-liability mismatches on less-than-one-year maturities as a percentage of interest-earning assets had eased, reflecting a lower degree of liquidity risk as funds were channelled to short-term loans.
We note that mismatches on longer-tenure maturities had also eased on SLF obtaining the convertible subordinated loan from FMO. The company’s capitalisation levels are deemed moderate. SLF’s total risk weighted capital adequacy ratio (RWCAR), although lower than most similar-rated peers, was well above the regulatory minimum of 10%. While its tier 1 RWCAR had declined to 10.32% as at end-FY Mar 2013 (end-FY Mar 2012: 12.67%) due to the expansion of its loan book, its overall RWCAR increased to 15.11% (end-FY Mar 2012: 12.67%), subsequent to the inclusion of the FMO loan.
Meanwhile, despite a relatively high dividend payout, SLF’s better performance had improved its internal capital generation to 9.27% (FY Mar 2012: 7.49%). While dividend payouts have been relatively high since SLH’s acquisition of SLF, we expect these to moderate going forward, given that the company has to adhere to FMO’s conditions with regard to RWCAR.
