RAM reaffirms Arpico Finance ratings at BB and NP

RAM Ratings Lanka has reaffirmed Arpico Finance Company Plc’s long-and short-term financial institutions ratings at BB and NP, respectively. Concurrently, the outlook on the long-term rating has been revised from stable to positive.

The positive outlook reflects the considerable improvement in the Company’s asset-quality indicators in recent years, despite the non-conducive economic climate. Arpico’s ratings are supported by its better-than-average asset quality and adequate capital base.

Nevertheless, the ratings are weighed down by high overheads, which hinder Arpico’s performance, and its small size.

Established in 1951, Arpico is the second-oldest registered finance company in Sri Lanka.

Despite its long operating history, the Company has remained small, accounting for less than 1% of the industry’s total assets as at end-March 2010.

Arpico has maintained its better-than-average asset quality. The Company’s gross nonperforming-loan ratio eased to 3.08% as at end-August 2010, from 4.83% as at end-FYE 31 March 2009. Its achievement in curtailing NPLs is even more impressive considering that its gross NPL ratio had climbed up to 32.01% as at end-FY March 2004.

Notably, Arpico has managed to improve its asset quality despite the harsh economic climate that prevailed over the last two financial years, during which most of its industry peers had reported worsening NPLs.

The Company’s better showing is anchored by a reduction in absolute NPLs through its conservative lending, strengthened monitoring and recovery procedures as well as expanding loan portfolio. Meanwhile, adequate provisioning has permitted Arpico to also record a better net NPL ratio of 1.26% as at end-August 2010 (end-FY Mar 2009: 2.41%).

While its asset quality has ameliorated, Arpico’s performance has still been hampered by rising overheads and lacklustre demand for real estate. The Company’s cost-to-income ratio had been elevated to 94.35% as at end-FY March 2010 (end-FY March 2009: 90.48%). Furthermore, overheads are expected to ascend in line with the opening of new branches. Nonetheless, RAM Ratings Lanka expects Arpico’s performance to improve once the new branches break even.

Meanwhile, it opines the Company’s capital cushioning is adequate. The Company’s core and overall capital-adequacy ratios remained at a respective 14.83% and 17.51% as at end-FY March 2010, well above the minimum statutory requirements of 5% and 10%.

RAM Ratings Lanka opines that Arpico’s funding and liquidity levels are moderate; the Company’s deposit base had charted robust growth during the reviewed period. Nonetheless, aggressive loan growth has diminished Arpico’s liquidity position, albeit it remains at manageable stance.