RAM reaffirms Bartleet Finance’s ratings at BBB-/P3; outlook revised from stable to negative

RAM Ratings Lanka has reaffirmed Bartleet Finance PLC’s (“BFL” or “the Company”) respective long- and short-term financial institution ratings at BBB- and P3.

Simultaneously, the long-term issue rating of BFL’s LKR 204 million Unsubordinated Unsecured Redeemable Debenture (2011/2016) has also been reaffirmed at BBB-. However, the outlook on the long-term ratings has been revised from stable to negative.

The revision of the outlook is underpinned by BFL’s heightened exposure to equity investments, which has increased its vulnerability to market risk and eroded its liquidity levels, as well as rising overheads driven by its branch expansion. Meanwhile, the ratings are supported by the sturdy franchise of the Bartleet Group (“the Group”) and the Company’s moderate funding and capitalisation levels. On the other hand, the ratings are pressured by the potential influx of non-performing loans (“NPLs”) that could arise as the new loans season subsequent to its aggressive loan expansion, as well as its weak core performance and small size relative to its similar-rated peers.

RAM Ratings Lanka opines that BFL’s asset quality is moderate. The Company’s asset quality is weighed down by its heightened exposure to equity investments and the rapid expansion in its loan book. BFL had doubled its equity investments in the first 6 months of FYE 31 March 2012 (“1H FY Mar 2012”) to LKR 537.26 million as at end-September 2011; this amounted to 83.52% of its shareholders’ funds, far exceeding the Central Bank of Sri Lanka’s (“CBSL”) stipulated limit of 25%. Further, the Company does not mark-to-market its equity investments, which led to the overstatement of profits and shareholders’ funds; the unrealised losses during 1H FY Mar 2012 amounted to LKR 67 million. We view the management’s high-risk appetite with concern as it exacerbates BFL’s vulnerability to market risk.

BFL remained small accounting for only 2.42% of the total registered finance company (“RFC”) industry’s assets as at end-March 2011. The Company’s loan book expanded 34.59% year-on-year (“y-o-y”) during FY Mar 2011 and further increased by 62.91% y-o-y in 1H FY Mar 2012. The Company’s credit quality had improved during fiscal 2011, subsequent to the clearing of BFL’s books by transferring its non-performing loan (“NPLs”) to its parent Bartleet Transcapital Limited (“BTC”) as well as curtailed lending to high-risk loan segments. Its gross NPL ratio ameliorated to 3.97% as at end-September 2011 from 4.55% as at end-FY Mar 2011, largely due to its enlarged credit assets. Going forward, loan delinquencies may increase as a considerable portion of BFL’s credit assets have yet to be seasoned.

Although the Company’s performance improved in FY Mar 2011, mainly supported by the 187.53% y-o-y growth in non-interest income propelled by capital gains from its equity portfolio, it had weakened in 1H FY Mar 2012 as a result of the downturn in the stock market. BFL’s increased dependence on equity investments has increased the volatility of its profits. This, coupled with rising overheads driven by its aggressive branch expansion, had hampered profitability in 1H FY Mar 2012. Although its margins improved during 1H FY Mar 2012, our concerns hinge upon its weak core performance, as reflected in its thin net interest margin (“NIM”) of 7.10% relative to its peers as well as the higher cost-to-income ratio of 88.34% in 1H FY Mar 2012.

RAM Ratings Lanka deems BFL’s liquidity levels to be weak, as reflected by the deterioration in its statutory liquid asset ratio as a result of channelling its funds to equity investments as well as the worsened maturity mismatches; its statutory liquid assets ratio clocked in at 10.81% as at end-September 2011, which is weak relative to its peers. Meanwhile, the Company’s funding position is deemed moderate owing to the deposit-dominated funding mix and conservative loans-to-deposit (“LD”) ratio of 89.87% as at end-September 2011.

RAM Ratings Lanka deems the Company’s capitalisation levels to be moderate. This had weakened in fiscal 2011 amid the rapid loan expansion, as reflected in its respective tier-1 and overall risk-weighted capital adequacy ratios (“RWCARs”) of 8.48% and 8.98% as at end-FY Mar 2011, but it had improved to 10.64% and 11.02% respectively as at end-September 2011 on the back of a (relatively low) accumulation of profits, albeit above the regulatory limits.

BFL’s ratings may be downgraded if its exposure to equity investments is not reduced to within the regulatory limits and if the Company does not demonstrate a sustainable improvement in its core performance to be on par with similar-rated peers.