ICRA Lanka Limited, a subsidiary of ICRA Limited, a group company of Moody’s Investors Service, has assigned the issuer rating of [SL]BBB- with a stable outlook to Alliance Finance Company PLC (AFCP).

ICRA Lanka has also assigned the issue rating of [SL]BBB- with a stable outlook to the Rs.1,000 million senior, unsecured, redeemable debentures programme of the company, currently listed on the Colombo Stock Exchange. 

ICRA Lanka has also assigned issue ratings of [SL]BB+ with stable outlook to the Rs.480.17 million subordinated unsecured redeemable debenture programme and Rs.613.14 million subordinated unsecured redeemable debentures programme of the company currently listed on the Colombo 
Stock Exchange.

The ratings factor in the established track record of the company in the financing business, a fairly diversified lending portfolio, comfortable asset quality and a fairly diversified funding profile. The ratings are however constrained by its high gearing and moderate profitability indicators. The ratings take note of the strict loan to value (LTV) ratio for vehicle financing, which is expected to increase competitive pressure and impact business growth and margin expansion for the players including AFCP.

ICRA Lanka takes note of the company’s initiative to diversify its portfolio, which could reduce the share of vehicle financing going forward from current levels; however, ability to grow at an optimal pace in the new target segments namely mortgage loans and business loans, etc. without impacting its asset quality and generating good risk adjusted returns would be critical.

AFCP is one of the older finance company in Sri Lanka with a track record of more than 60 years. The company has presence in 89 locations (39 branches, 21 microfinance service locations, 12 gold loan centres and 17 collection centres) covering all 25 districts of the country. 

The company’s key products are leasing, which accounts for 67 percent of the total portfolio as on June 30, 2017, followed by loans (23 percent), microfinance (7 percent), gold loans/pawning (2 percent) and hire purchase (1 percent). In terms of asset classes, three-wheeler financing (21 percent), car financing (18 percent), lorry financing (12 percent), mortgage loans (9 percent) and van financing (8 percent) were the key constituents of AFCP’s portfolio.

The other key asset classes include microfinance (group lending), equipment financing, two-wheeler financing, which account for 13 percent of the portfolio. ICRA Lanka notes that the portfolio growth is expected to remain at about 20-25 percent over the near to medium term with focus on four-wheeler financing.

The company’s gross NPA ratio increased to 17.4 percent on March 31, 2014 from 2.2 percent on March 31, 2013 because of the stress on its pawning exposures. The same however improved over FY2015 and FY2016, largely on account of the large write-offs and recoveries made during the period. As on March 31, 2017, the company reported a gross NPA of 2.1 percent and a net NPA of 0.8 percent when compared to gross NPA of 2.5 percent and net NPA of 0.7 percent in March 2016.

The gross and net NPA stood at 2.6 percent and 1.3 percent as on June 30, 2017. ICRA Lanka notes that while the asset quality indicators are comfortable presently, ability to control incremental slippages, especially in the target business segments for growth, would be a key monitorable. The ratings nevertheless take note of the strengthening in the company’s management team and internal control process and systems, which provide some comfort.

AFCP has a fairly diversified funding profile comprising of retail fixed deposits, debentures and term loans from banks. As on June 30, 2017, around 42 percent of the company’s funding was from deposits, while the balance was through debentures and bank loans. Going forward, the company is expecting to maintain a 45:55 share between deposits and other borrowings. ICRA Lanka notes that Top 10 depositors accounting for 15 percent of the company’s total deposits as on June 30, 2017 indicates concentration in its deposits profile. 

However, funding lines from 12 banks and good deposit renewal rate of 80 percent provides comfort from a liquidity perspective. The company reported a positive short term (less than one year) ALM mismatch of 1 percent as of June 30, 2017, which is quite comfortable as compared to most peers.
The company’s gearing1 moderated to 8.7 times on March 31, 2017 from 9.7 times as on March 31, 2016 as the portfolio growth moderated to 21 percent (28 percent in FY2016), while the internal generation improved to 17.9 percent in FY2017 (16.5 percent in FY2016); the company also raised capital of Rs.71 million via a rights issue in January 2017. ICRA Lanka notes that notwithstanding the moderation, the capital structure is stretched on account of the high leverage. The company’s core Tier-I and total capital adequacy ratios stood at 10.0 percent and 13.8 percent, respectively, as on June 30, 2017. 

The company’s capital adequacy was supported by the issuance of Rs.606 million subordinate debenture in March 2017. AFCP’s business yield moderated from about 24-25 percent in FY2014-FY2015 to about 22-23 percent currently because of its shift to lower yielding four-wheeler financing from three-wheeler financing. Going forward, AFCP’ yields are expected to be under pressure in view of the increased focus on four-wheeler financing. The NIMs have consequently moderated from 9.9 percent in FY2016 to about 9.3 percent in FY2017. ICRA Lanka notes that the credit cost increased to 1.8 percent in Q1FY2018 (0.3 percent in FY 2017 and 1.5 percent in FY2015) because of the accelerated provision made by the company on account the portfolio impacted by the recent floods and because of the additional provision made post CBSL’s review. 

The operating efficiency improved with the portfolio expansion; operating cost /ATA reduced to 7.1 percent for Q1FY2018 from 7.3 percent in FY2017 and 7.8 percent in FY2016. AFCP’s profitability (return on average assets) reduced to 1.6 percent in Q1FY2018 (2.4 percent in FY2017 and 1.9 percent in FY2016) largely because of the increased credit costs and remains moderate in relation to peers. Ability of the company to improve its profitability going forward would be crucial.