RAM reaffirms CDB’s ratings at BBB/P2 with a stable outlook
Wednesday, 9 October 2013 00:00
-
- {{hitsCtrl.values.hits}}
RAM Ratings Lanka has reaffirmed Citizens Development Business Finance PLC’s (CDB) respective long- and short-term financial institution ratings at BBB and P2. Concurrently, it has reaffirmed the long-term issue rating of the company’s Rs. 250 million Unsubordinated Unsecured Redeemable Unlisted Debentures at BBB. The long-term ratings carry a stable outlook. CDB’s ratings are supported by its average asset quality and capitalisation levels.
CDB is a medium-sized licensed finance company, accounting for 4.22% of the industry’s assets as at end-March 2013. The company’s primary activities include the provision of leasing, hire-purchase and personal credit facilities as well as pawning, while remaining a leading player in the highly-competitive 3-wheeler financing segment. CDB obtains funding through public deposits and borrowings.
Overall, the company’s asset quality is viewed as average. Despite the deterioration in its loan quality in 1Q FYE March 2014, its gross non-performing loan ratio was in line with peers’ as at end-July 2013. CDB’s credit assets grew approximately 40% year-on-year in fiscal 2013.
The company’s absolute gross NPLs surged 91.45% y-o-y in fiscal 2013 as its loan books seasoned amidst a less conducive macro-economic environment. CDB’s loan quality worsened in 1Q FY Mar 2014, its absolute gross NPLs increasing a further 110.29% on the back of an increase in new NPLs from its pawning. Overall, CDB’s gross NPL ratio deteriorated to 4.23% as at end-1Q FY Mar 2014 (end-FY Mar 2012: 1.67%), but had improved by end-July 2013 as the company auctioned gold collateral pledged in respect of its non-performing pawning portfolio. As such, its gross NPL ratio of 3.53% as at end-July 2013 was in line with peers’.
Elsewhere, CDB’s NPL coverage ratio declined to 43.46% as at end-1Q FY Mar 2014 (end-FY Mar 2012: 145.68%). Going forward, RAM Ratings Lanka’s concerns hinge on the possibility of new NPLs trickling in as the company’s loan books continue to season.
CDB’s performance is viewed as average owing to performance indicators that were in line with that of peers. The company’s net interest margin narrowed to 8.88% in FY Mar 2013 (FY Mar 2012: 10.04%) as deposits re-priced upwards faster than loans in a rising interest rate environment. Its cost to income ratio improved to 58.51% in fiscal 2013 (fiscal 2012: 62.55%) despite an increase in operating expenses.
Overall, CDB’s pre-tax profit rose 25.87% y-o-y to Rs. 669.99 million, which translated into a return on assets of 3.26% in FY March 2013 (FY March 2012: 3.97%); the ratio was in line with similar-rated peers’. In contrast, in 1Q FY Mar 2014, the company’s NIM improved to 9.11% amidst improved yields while its cost to income ratio worsened to 61.08%. Further, the company’s ROA declined to 2.66%, weighed down by rising credit costs, which reflected its worsening loan quality.
Going forward, CDB’s overall performance is expected to remain relatively stable.
While core performance is likely to pick up in view of easing interest rates, the improvement is expected to be moderated by rising credit costs and the potential increase in overhead costs from planned branch expansion.
CDB’s funding base continued to be dominated by customer deposits, aided by the company’s widening branch reach and aggressive advertising and marketing strategies. CDB’s loans to deposit ratio remained relatively unchanged at 111.15% as at end-FY March 2013 (end-FY March 2012: 117.92%) amid slower loan growth, comparing better to that of peers. The company’s liquidity position is deemed average. Its statutory liquid asset ratio stood at 12.96% as at end-June 2013, weakening from 14.49% as at end-FY March 2013 (end-FY March 2012: 13.30%) in view of loan growth. The ratio is likely to moderate further going forward, given planned loan growth.
CDB’s capital adequacy is deemed average.
Its tier 1 and overall risk-weighted capital adequacy ratios moderated to 13.22% as at end-June 2013 from 14.43% as at end-FY March 2013 (end-FY March 2012: 16.81% and 17.05%, respectively) in view of loan growth.
The ratios remained in line with that of similar-rated peers.
