RAM upgrades Commercial Credit and Finance ratings to BB+/NP

RAM Ratings Lanka has upgraded Commercial Credit and Finance PLC’s long-term financial institution rating from BB to BB+, while reaffirming the short-term rating at NP. Concurrently, a long-term BB rating has been assigned to the company’s proposed Rs. 500 million Unsecured Subordinated Redeemable debentures. Both long-term ratings have a stable outlook.

The upgrade reflects the company’s improving performance indicators and expanding market share. The ratings are, meanwhile, supported by CCF’s healthy performance and adequate funding levels. Nevertheless, the ratings are moderated by the company’s relatively unseasoned loan portfolio given its aggressive growth of late, and also its average capitalisation levels.

CCF is a licensed finance company that has been operating for over 29 years. The company underwent a change in ownership in September 2009, following which it had shifted its focus to micro financing; its previous emphasis had been on leasing and hire-purchase.

Consequently, CCF’s loan portfolio has been expanding robustly, with its market share (company’s assets as a percentage of total industry assets) increasing from 1.42% as at end-March 2010 to 3.35% as at end-March 2012. Concurrently, the company’s performance indicators have also improved; its net interest margin clocked in at 22.38% in FYE 31 March 2012 – from 18.32% the previous year – and was among the highest in the industry. Meanwhile, its return on assets of 13.70% was also among the best in the industry.

Meanwhile, we opine that CCF’s asset quality is moderate, mainly owing to its relatively unseasoned loan portfolio given its aggressive year-on-year loan growth of 94.98% in fiscal 2012. That said, we note that 40% of the portfolio expansion had stemmed from micro financing, which generally exhibits low delinquency rates. Nevertheless, the quality of the company’s key HP segment remained weak, thereby leading to a 15.27% y-o-y increase in gross non-performing loans last year, which translated into a gross NPL ratio of 3.25%. The company’s NPL coverage of 42.24% in fiscal 2012 is also weaker than its peers’.

On a separate note, CCF’s performance is viewed to be healthy owing to its relatively broad NIM and lower cost-to-income ratio. Driven by the aggressive expansion of high-yielding products, its NIM widened to 22.38% in FY Mar 2012. Supported by its improving top line, CCF’s cost-to-income ratio also eased from 63.28% to 44.59% y-o-y – a healthy level compared to its LFC peers. Overall, the company’s performance indicators stayed healthy, although we opine that further weakening of the company’s asset quality may impinge upon its performance.

CCF’s funding profile is dominated by customer deposits, which accounted for 71.89% of its total funding as at end-FY Mar 2012. Meanwhile, the company has increased its debt exposure, which now accounts for 15.75% of its funding base. Amid rapid loan growth, CCF’s loans-to-deposits ratio climbed up to a relatively high 124.84% as at end-FY Mar 2012. Furthermore, its liquidity position is considered adequate. The company’s statutory liquid-asset ratio recovered to historical levels in fiscal 2012, clocking in at 14.40% at the end of the period (end-FY Mar 2011: 9.88%) – more or less in line with those of its similarly rated peers. On a separate note, CCF’s capitalisation levels are still average, albeit better y-o-y; its tier-1 and overall risk-weighted capital-adequacy ratios came up to a respective 10.34% and 10.99% as at end-FY Mar 2012 (end-FY Mar 2011: 6.21% and 7.44%). The company may find it a challenge to maintain its growth momentum, unless further capital can be raised. On this score, the proposed Rs. 500 million subordinated debentures will enable CCF to expand its loan books by approximately 48% while maintaining its RWCAR at current levels.