Monday, 28 October 2013 01:09
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RAM Ratings Lanka has reaffirmed Arpico Finance Company PLC’s respective long- and short-term financial institution ratings at BB and NP. The ratings have been placed on Rating Watch Negative.
RAM has also withdrawn the BB rating of the company’s Rs. 500 million Unsecured Senior Redeemable Debentures (2012/2017) and assigned a BB- to its proposed Rs. 600 million Unsecured Subordinated Redeemable Listed Debentures (2013/2018).
The Negative Rating Watch is premised on our concerns over Arpico’s heightened regulatory risk given that its overall risk-weighted capital-adequacy ratio (“RWCAR”) stands below the regulatory requirement of 10%. This is expected to be addressed through the issuance of subordinated debt in 3Q FYE 31 March 2014 (“FY Mar 2014”) and therefore, its successful issuance is viewed to be imperative in remedying its capital shortfall as well as supporting its loan growth and performance.
Small stature
The ratings continue to be moderated by Arpico’s small stature, weak capitalisation levels and high cost profile relative to similarly-rated peers. Nevertheless, the ratings are supported by its average asset quality.
Arpico remains a small licensed finance company (“LFC”), accounting for only 0.79% of the industry’s assets as at end-March 2013. Despite the company’s 62-year operating history, its geographical presence remains limited, with its network of nine branches and five pawning centres.
Arpico’s capital adequacy weakened in FYE 31 Mar 2013 (“FY Mar 2013”), following aggressive loan growth; its tier-1 and overall RWCARs declined to 8.04% and 9.17%, respectively as at FY Mar 2013 (FY Mar 2012: 9.22% and 11.03%), the latter falling below the regulatory minimum of 10%.
This is expected to be addressed through the issuance of subordinated debt in 3Q FYE 31 March 2014. However, if capital constraints persists the company’s weak capital adequacy position will hinder loan growth.
“Elsewhere, we note that the company had through internal capital generation, met the regulatory minimum core capital requirement of Rs. 300 million by December 2012, in accordance with Central Bank of Sri Lanka (“CBSL”) regulations,” RAM said.
Average asset quality
Arpico’s asset quality is deemed average as its gross non-performing loan (“NPL”) ratio remained in line with peers while the quality of its core portfolio, 3-wheeler financing, had been maintained in fiscal 2013.
Arpico’s credit assets grew at a strong 73.32% year-on-year in fiscal 2013. The company’s focus on 3-wheeler financing continued and dominated the portfolio at 31.62% as at end-March 2013; that said motorcycles and small trucks recorded strong growth.
While Arpico’s absolute gross NPLs surged 106.30% y-o-y in fiscal 2013, the quality of the company’s core portfolio, 3-wheeler financing, had been maintained with delinquency rates standing below 1% as at end-FY Mar 2013.
Overall, Arpico’s gross NPL ratio worsened to 2.39% as at end-FY Mar 2013 (end-FY Mar 2012: 2.02%), albeit remaining in line with peers’. That said, in view of strong growth in fiscal 2013, our concerns hinge upon the possible accretion of new NPLs going forward as the company’s loan book continues to season; this may be further exacerbated by restricted loan growth in the event that capital constraints persist. Elsewhere, the Company’s NPL coverage had declined to 129.85% as at end-FY Mar 2013 (end-FY Mar 2012: 214.10%).
Below average performance
Arpico’s performance is viewed as below average. Despite a Net Interest Margin in line with its peers’, the company’s high-cost operating profile continued to hamper overall performance, as reflected in its lower-than-peer return on assets (“ROA”) and return on equity (“ROE”) ratios. Arpico’s overhead expenses rose a further 50.90% y-o-y in fiscal 2013 driven by increased marketing expenses and expenses relating to the refurbishment of its head office.
The higher costs resulted in the company’s cost to income ratio remaining weaker than peers’ at 84.33% in FY Mar 2013 (FY Mar 2012: 86.76%).
If capital constraints persists, Arpico’s overall performance is likely to be subdued going forward, hampered by restricted loan growth and its high cost operating profile.
Funding base
The company’s funding base largely consisted of public deposits, however tilting further towards borrowings, as deposit growth of 47.01% y-o-y in FY Mar 2013 did not keep pace with loan growth. Borrowings comprised of loans collateralised against lease receivables.
The increased reliance on borrowings to fund loan growth led to Arpico’s loans-to-deposits ratio deteriorating to 150.21% as at end-FY Mar 2013 (end-FY Mar 2012: 127.41%).
Elsewhere, the company’s liquidity levels were viewed as below average. Its statutory liquid asset ratio stood at 10.35% as at end-March 2013 (end-March 2012: 13.79%), only marginally above the minimum regulatory requirement.
The company’s liquid assets to deposits and short-term borrowings ratio had worsened to 4.67% as at end-FY Mar 2013 (FY Mar 2012: 5.59%).
“We highlight that the Negative Rating Watch will be lifted and the ratings reinstated if capital adequacy is raised to levels that will support the company’s growth plans which is expected to be achieved through the successful issuance of subordinated debentures. Conversely, the company’s ratings will come under pressure if its capital adequacy remains weak while asset quality indicators weaken to levels that are below similar rated peers’,” RAM said.
