RAM reaffirms Alliance Finance Company PLC’s ratings at BBB/P2

RAM Ratings Lanka has reaffirmed Alliance Finance Company PLC’s (AFC) respective long- and short-term financial institution ratings at BBB and P2. Concurrently, RAM Ratings Lanka has also assigned the following issue ratings:

Rs. 1.00 billion Unsecured Subordinated Redeemable Debentures (2012/2017) – BBBLKR and 500 million Unsecured Commercial Paper (2012/2013) - P2.

All the long-term ratings have a stable outlook. The ratings are upheld by AFC’s adequate asset quality, performance and capitalisation, but tempered by its moderate funding and liquidity positions as well as its unseasoned loan portfolio given its rapid loan growth.

RAM Ratings Lanka opines AFC’s asset quality to be adequate. Supported by stronger recoveries and a more conducive macroeconomic climate, the Company’s non-performing loans (NPLs) were reduced to Rs. 290.62 million as at the end of FYE 31 March 2011 (FY Mar 2011) (end-FY Mar 2010: Rs. 388.85 million), translating into a gross NPL ratio of 4.14% (end-FY Mar 2010: 8.02%); absolute NPLs had remained relatively unchanged at Rs. 289.87 million by end- December 2011. The gross NPL ratio improved to 2.80% owing to its aggressive 75.61% year-on-year (y-o-y) (or Rs. 3.77 billion) loan growth. The ratio is now in line with those of its similarly rated peers. That said, our concern hinges upon the NPLs that could arise once new loans get seasoned.

Meanwhile, the Company’s performance has been improving, and is now deemed adequate. On the back of its aggressive loan growth, AFC’s interest income surged 40.65% y-o-y in the first nine months of FY Mar 2012 (9M FY Mar 2012), i.e. faster than in fiscal 2011. Given the environment of tapering interest rates, its interest expenses only went up 8.73% y-o-y in the same period as most of AFC’s deposits have short tenures and re-priced faster than its loans. As such, its net interest margin (NIM) widened from 7.44% to 9.86% in 9M FY Mar 2012. We note that it is now in line with its similarly rated peers. Despite increased overheads caused by branch expansion, AFC’s cost-to-income ratio dipped to 62.87% supported by improved top line in 9M FY Mar 2012; however is on the higher side compared to those of its similarly rated peers. Backed by its healthier core performance, AFC’s pre-tax profit surged to LKR 295.44 million in 9M FY Mar 2012 (FY Mar 2011: Rs. 234.79 million). AFC’s funding position is perceived to be moderate despite the 31.09% y-o-y surge in its deposits; its loans-to-deposits (LD) ratio worsened to 141.55% as at end-December 2011 (end-March 2011: 114.76%), on the back of its rapid loan growth that had been largely funded by long-term borrowings. Deposits still dominate the Company’s funding composition, accounting for 56.51% of its funding base as at end-December 2011, albeit lower than the 65.39% as at end- March 2011 following its heightened exposure to borrowings.

On a separate note, AFC’s liquidity profile is perceived to be moderate. Its statutory liquid-asset ratio dipped from 17.33% as at end-March 2011 to 12.27% as at end-December 2011, a result of its aggressive loan expansion; this is weaker than those of its similarly rated peers. Looking ahead, the Company’s liquidity levels are expected to improve subsequent to its planned debt issues.

Moreover, the Company’s capitalisation levels are adequate. AFC’s tier-1 and overall risk-weighted capital-adequacy ratios (RWCARs) clocked in at 9.20% and 11.83%, respectively, as at end-December 2011 (end-FY Mar 2011: 10.31% and 13.09%). The ratios had moderated amid its rapid loan growth, although still in line with those of its similarly rated peers. Looking ahead, these ratios are expected to improve following the issuance of AFC’s proposed Rs. 1.00 billion subordinated debentures.