RAM Ratings reaffirms Alliance Finance’s ratings at BBB/P2

RAM Ratings Lanka has reaffirmed Alliance Finance Company PLC’s respective long- and short-term financial institution ratings at BBB and P2. Concurrently, RAM Ratings Lanka has assigned a long-term rating of BBB- to AFC’s proposed Rs. 200 million unsecured subordinated redeemable debentures. The outlook on the long-term ratings is stable.

AFC’s ratings are supported by the Company’s moderate financial performance and capitalization as well as its reputable franchise.

Established more than 55 years ago, the Company ranks among the oldest registered finance companies in Sri Lanka. In the past few years, the management had adopted a relatively conservative growth strategy; as such, AFC remains a medium-sized player in the industry, accounting for only 3.37% of the industry’s assets as at end-June 2010. However, we note that the Company had pursued a relatively expansionary strategy in recent months.

Although AFC’s asset quality had been on a weakening trend during FYE 31 March 2010, strengthened recoveries during the subsequent months had resulted in an improvement by end-August 2010.

As such, the Company’s gross non-performing-loans ratio which had previously deteriorated from 5.84% as at end-FY Mar 2009 to 8.16% as at end-FY Mar 2010, has recovered to 6.37% as at end-August 2010.

NPLs had stemmed mainly from the solar panels and consumer durables segments, primarily due to the challenging economic environment and technical defects in the solar products.

Nevertheless, management steps to strengthen recoveries in these two segments had borne fruit in recent months; as such absolute NPLs had reduced from Rs. 337.23 million as at end-March 2010 to Rs. 295.31 million by end-August 2010.

On a separate note, the Company’s performance remained moderate during the reviewed period.

Although net interest income ebbed 10.19% year-on-year to Rs. 246.66 million during FY Mar 2010, this was mitigated by gains made on the Company’s equity portfolio. These gains amounted to Rs. 181.89 million, emanating from the disposal of shares held in an insurance company.

Consequently, AFC’s return on assets remained unchanged at 1.30% during FY Mar 2010, although this was stronger than the industry average of 0.07% as at the same date.

Meanwhile, the Company’s ROA dipped to 1.18% during the five month period to August 2010, primarily owing to discretionary provisions of Rs. 36.0 million which pushed up the Company’s overhead costs. Excluding these provisions, the Company’s ROA clocked in at an improved 2.53% as at the same date.

The Company’s liquidity position improved during the reviewed period; its statutory liquid asset ratio clocked in at 16.97% as at end-June 2010, above the regulatory minimum. Meanwhile, deposits continued to dominate the Company’s funding base, accounting 70.64% as at end-August 2010. RAM Ratings Lanka also derives comfort from its unutilised funding lines amounting to Rs. 230.0 million.

Meanwhile, the Company’s tier-1 and overall risk weighted capital-adequacy ratios clocked in at 10.39% and 12.76% respectively as at end-August 2010, supported by internal capital generation. Looking ahead, its overall capitalisation is expected to strengthen subsequent to the issuance of the proposed Rs. 200 million subordinated debentures.