RAM reaffirms Associated Motor Finance’s rating at BB-/NP

RAM Ratings Lanka has reaffirmed Associated Motor Finance Limited’s (“AMF” or “the Company”) respective long-and short-term financial institution ratings at BB- and NP; the outlook on the long-term rating is stable.

The ratings are constrained by the Company’s small stature and high product-concentration risk. However, the ratings are supported by its adequate funding, healthy profitability, wide dealer base, and ability to maintain lower-than-industry non performing loans (“NPL”) despite the high risk involved in the motorcycle segment.

AMF is a family-owned registered finance company (“RFC”) that began operations in 1962. Although the Company has been in operation for 48 years, it accounted for only 0.34% of the total assets in the industry as at September 2010. Against its peers, AMF is disadvantaged competitively due to its small size, lack of branch network and product concentration. The product-concentration risk arises as a result of AMF focusing mainly on motorcycle financing.

AMF had further strengthened its dealer base during FYE 31 March 2010 (“FY Mar 2010”). The wider dealer base not only negated AMF’s disadvantage of operating out of just 1 branch, but also helped the Company grow its loan base and contributed towards improved recoveries. However, RAM Ratings Lanka notes that due to the lack of a branch network, AMF has lost access to other avenues of financing. Although the Company’s loan growth had traditionally been moderately consistent, its gross loan portfolio had contracted from LKR 309.05 million as at end-FY March 2009 to LKR 292.62 million as at end-FY March 2010. This was because AMF curtailed lending amid the worsened macroeconomic conditions. Nonetheless, in line with the improved economic fundamentals, the Company was successful in subsequently expanding its loan base to LKR 373.05 million as at end-September 2010.

Despite the Company’s loan expansion and the higher risk segment to which it is exposed, AMF has managed to continuously keep its asset quality indicators below industry average. There was a sudden increase in the Company’s gross NPL ratio to 7.88% as at end-FY Mar 2010, up from 3.85% the previous year, due to higher delinquencies and its contracted loan portfolio. Nonetheless, improved recovery and monitoring efforts helped bring the ratio down to 3.92% during 1H FY Mar 2011; absolute NPLs dipped from LKR 25.06 million to LKR 16.07 million during the same period. Looking at the positive macroeconomic outlook coupled with the Company’s effective monitoring procedures, RAM Ratings Lanka expects AMF’s asset quality to remain healthy vis-à-vis its peers.

AMF’s performance had weakened slightly during FY March 2010 owing to the slower loan growth, tighter net interest margin (“NIM”) and higher provisioning. AMF’s NIM had eased to 12.21% in FY Mar 2010 (FY Mar 2009: 16.62%) as a result of the contracted loan base and expanded deposit base. As such, the Company’s pre-tax profits reduced by 13.00% to LKR 41.91 million during the same period. A declining trend was seen in return on equity (“ROE”) and return on assets (“ROA”) as well. As at end-FY March 2010, ROE and ROA had respectively eased to 18.14% (end-FY Mar 2009: 29.87%) and 7.53% (end-FY Mar 2009: 11.24%). However, AMF still managed to maintain these ratios above industry averages.

On a separate note, the Company’s core capital had augmented from LKR 196.37 million as at end-FY March 2009 to LKR 265.69 million as at end-FY March 2010 as a result of strong internal capital generation. Furthermore, the Company’s tier-1 and overall Risk Weighted Capital Adequacy Ratio (“RWCAR”) clocked in at 58.60% as at end-FY Mar 2010, well above the regulatory minimums of 5% and 10%, respectively. Nevertheless, this is expected to ease as the Company’s pursuit of the expansion of its loan books.

AMF’s profit accumulation and expansion of deposits have favourably influenced its liquidity and funding profile. The Company maintained a statutory liquidity ratio of 78.71% as at end-FY Mar 2010, well above the required level of 10%.