RAM reaffirms Alliance Finance Company’s ratings and revises Outlook to Positive

RAM Ratings Lanka has reaffirmed Alliance Finance Company PLC’s (AFC) respective long- and short-term financial institution ratings at BBB and P2. Concurrently, the Outlook on the long-term rating has been revised from Stable to Positive.

The revision of the Outlook reflects the company’s improving financial performance and the fact that it has maintained its asset quality indicators, despite strong loan growth.

The ratings are upheld by AFC’s above average asset quality and performance while being tempered by its average liquidity level and unseasoned loan portfolio, given rapid loan growth.

The revision of the outlook to positive reflects the improving trend in AFC’s performance since fiscal 2011, supported by loan growth.

 Its net interest margins and overall profits have, as such, consistently improved. AFC has also managed to maintain its asset quality indicators, as reflected by a slower increase in non-performing loans and an improving gross NPL ratio.

RAM Ratings Lanka deems the company’s asset quality to be above-average.  AFC has continued to focus on three-wheeler financing that has a relatively low delinquency rate, while increasing its exposure to gold loans that are fully-backed by easily liquefiable gold. As such, supported by the latter and good underwriting and recovery measures, the company’s absolute NPLs remained largely unchanged in FYE 31 March 2012 and the first six months of FY Mar 2013, despite the rapid expansion of its loan book. AFC’s gross NPL ratio improved to 2.39% as at end-FY Mar 2012 from 4.14% the previous year and is in line with that of similarly-rated peers.

AFC’s financial performance is opined to be above average; its financial indicators have improved on the back of strong loan growth and increased exposure to relatively more lucrative segments such as gold loans.

This resulted in a wider NIM of 9.79% in FY Mar 2012, better than similarly-rated peers’.

The company’s historically high cost-to-income ratio had improved as a result of strong top line growth and is now in line with that of peers.

AFC recorded a pre-tax profit of Rs. 502.95 million in FY Mar 2012, compared to Rs. 252.91 million the previous year.

Looking ahead, its performance may moderate with relatively slower loan growth, however, remaining better than that of similarly-rated peers.

AFC’s funding position is deemed average. Despite its long-operating history, its franchise remains average.

However, with aggressive advertising campaigns and an increased geographical presence, the company’s deposit base grew 34.57% year-on-year in fiscal 2012, continuing to expand at a similar pace in 6M fiscal 2013.

However, its increased exposure to borrowings in fiscal 2012 resulted in a weaker loan-to-deposit ratio of 148.88%. AFC’s funding structure continues to be dominated by customer deposits.

The company’s liquidity is viewed to be average. Its statutory liquid-asset ratio had dipped to 12.40% as at end-March 2012 amid aggressive loan growth (end-March 2011: 17.33%), remaining largely unchanged as at end-September 2012. The ratio is in line with that of similarly-rated peers. The company’s capitalisation levels are adequate. Its tier-1 and overall risk weighted capital adequacy ratios dropped to 10.38% and 12.56%, respectively, as at end-March 2012 (end-March 2011: 10.64% and 13.39%) amid strong loan growth, decreasing further as at end-September 2012. Elsewhere, AFC’s internal capital generation is good, coming in at 26.83% as at end- September 2012. Its current capitalisation level is sufficient to support planned loan growth of around 20%.

AFC’s ratings may be upgraded should the company maintain its asset quality and performance indicators at levels commensurate with a BBB+ rating.

Conversely, a stable rating outlook may be reinstated and the ratings reaffirmed should its asset quality significantly deteriorate as a result of the expansion of its loan book.