Fitch affirms CBC Finance’s National Long-Term Rating at ‘BBB+(lka)’

Fitch Ratings has affirmed CBC Finance Ltd’s (CBCF) National Long-Term Rating at ‘BBB+(lka)’. The Outlook is Stable.
The rating is driven by the view that the parent, Commercial Bank of Ceylon PLC (CB: A(lka)/Stable), would provide extraordinary support to CBCF if required. 
CB’s ability to support CBCF is reflected in its credit profile, underpinned by its standalone strength. The support assessment also considers CB’s full ownership of CBCF, a record of ordinary support through multiple equity infusions and close brand alignment.

CBCF is rated two notches below its parent to reflect Fitch’s assessment of its limited importance to the CB group. CBCF mainly caters to high-yielding, under-banked customer segments with limited overlap with the parent bank’s core customer base. 
CBCF also accounts for a negligible share of CB’s group gross loans and its contribution to the group’s profitability remains miniscule, worsened by its net loss in 2023. Furthermore, CBCF has significant management independence and limited operational integration with the CB group.

“We believe CBCF’s intrinsic credit profile is considerably weaker than its support-driven rating due to its small franchise, with a loan market share of 0.8 percent as of end-2023, evolving business model, high-risk appetite and weak financial profile as reflected in its poor asset-quality metrics, weakened profitability and concentrated deposit base,” the rating agency said.
Net interest margin compression and a sharp increase in credit costs led to CBCF’s pretax loss/average asset ratio of 2.7 percent in 2023 (end-2022: pretax profit/average assets of 0.4 percent). Fitch expects the company’s earnings to improve in the near-to-medium term on its aggressive growth plans, declining funding costs and lower credit costs relative to 2023.

Fitch expects CBCF’s leverage ratio and regulatory capital ratios to be under pressure from its growth plan, which exceeds the pace of internal capital generation. That said, Fitch expects the ratios to remain above regulatory minimums. Reported net losses and asset growth in 2023 caused the company’s leverage ratio to increase to 3.5x (2022: 2.6x) and the regulatory Tier 1 capital ratio to fall to 19.6 percent (end-2022: 24.9 percent).

CBCF’s gross stage three loan (over 120 days past due) ratio remained high at 29.4 percent at end-2023, mainly due to its legacy non-performing loans (NPLs) but has gradually declined due to enhanced recovery measures and loan growth. CBCF’s planned asset growth should help moderate the NPL ratio in the near-to-medium term but asset-quality risk could rise as new loans season.