RAM reaffirms Softlogic Finance’s BBB-/P3 ratings

RAM Ratings Lanka has reaffirmed Softlogic Finance PLC’s respective long- and short-term financial institution ratings of BBB-/P3.

Concurrently, the long-term BBB- rating of the company’s proposed Rs. 500 million Redeemable Senior Debentures (2012/2014) has been reaffirmed. A short-term issue rating of P3 has also been assigned to SLF’s proposed Rs. 200 million Unsecured Commercial Paper (2012/2013). The long-term ratings carry a stable outlook. The financial institution and issue ratings are supported by the Company’s capitalisation which is better than that of most similar-rated peers, albeit tempered by its unseasoned loan portfolio and high cost profile.

SLF is a medium-sized licensed finance company, with a market share of 2.77% of total industry assets as at end-March 2012. It has grown aggressively since 2010, subsequent to coming under Softlogic Holdings PLC, a conglomerate with diversified business interests.

Although the company’s asset quality indicators have been relatively better than those of its peers, the rapid increase in non-performing loans from March 2012 to June 2012, coupled with an unseasoned loan portfolio is viewed with caution. SLF’s aggressive loan growth continued into FYE 31 March 2012, recording a 114.37% year-on-year surge. In contrast, loan growth slowed to 2.53% by end-June 2012 due to weaker credit demand in the industry coupled with management efforts to preserve liquidity.

The company’s absolute NPLs had increased 21.49% y-o-y, before rapidly rising 49.44% from end-March to end-June 2012 as a seasoning of SLF’s loan portfolio took effect. However, the bulk of the company’s loans remains unseasoned and may give rise to NPLs going forward.

SLF’s performance is deemed average due to its high cost profile, despite its better-than-peer net interest margin; the company’s NIM clocked in at 10.19% in FY Mar 2012 (FY Mar 2011: 9.96%) owing to a tilt towards higher-yielding personal loans (1Q FY Mar 2013: 7.61%). Its cost-to-income ratio, however, stood at a high 80.17% in FY Mar 2012 (FY Mar 2011: 74.69%), reflective of SLF’s aggressive branch expansion.

Going forward, a protraction of the break-even period for its new branches may result in a weaker performance as credit growth is expected to slow across the industry. In line with the company’s improved top line, pre-tax profits too grew 76.52% y-o-y to Rs. 149.67 million (FY March 2011: Rs. 84.79 million); nevertheless, its return-on-assets compared weaker than that of its peers’. Looking ahead, performance is expected to moderate given SLF’s high cost profile and expected slower credit demand amid a non-conducive economic environment.

Where SLF’s funding mix was previously dominated by borrowings, deposits now form the bulk, following a 195.42% y-o-y surge in deposits in FY Mar 2012. Its loan-to-deposit ratio had eased as at end-June 2012, clocking in at 150.79% (end-March 2011: 238.80%), albeit remaining higher than peers’. Going forward SLF intends to obtain from the Netherlands Development Finance Company, a loan amounting to Rs. 1.3 billion, a portion of which would be convertible subordinated loans; however, deposits are expected to remain the company’s main funding source.

SLF’s liquidity is in line with that of peers; its statutory liquid asset ratio clocked in at 22.47% as at end-March 2012 (end-March 2011: 17.13%), upheld by deposit growth and capital infusions during the year. Nevertheless, liquidity levels fell to 14.98% by end-June 2012, as a portion of liquid assets were utilised to pare down borrowings.

The negative gap between interest-earning assets and interest-bearing liabilities in the “less than one year” bucket, as a percentage of “less than one year” interest earning assets, had widened to 23.31% as at end-March 2012, from 14.81% last year, reflecting an increase in liquidity risk. However, the company’s unutilised funding lines of Rs. 265 million, expected funds from its commercial paper and the long-term loan from FMO are expected to ease liquidity risk to some extent going forward.

Elsewhere, SLF’s tier 1 and overall risk-weighted capital adequacy ratios declined to 12.67% as at end-March 2012 (end-March 2011: 13.41%) on the back of aggressive loan growth despite capital infusions, albeit better than most peers’.

The company’s high dividend pay-out had weakened its internal capital generation from 11.06% to 6.01% during the same period before declining to a negative 12.52%. Going forward, however, as conditions to obtain the FMO loan require that the company maintains RWCAR at 13% levels, dividend-payout levels are expected to be conservative.