ICRA Lanka Limited, a wholly owned subsidiary of ICRA Ltd, a group company of Moody’s Investors Service has assigned the Issuer rating of [SL]BBB (pronounced SL triple B) with a stable outlook to Commercial Credit and Finance PLC (CCF or the Company).

The rating factors in CCF’s established business presence in Sri Lanka, its experienced senior management team along with the presence of a private equity investor who holds about 28 percent stake in the company and, its robust profitability indicators.

ICRA Lanka however takes note of CCF’s high gearing level, significant dependence on deposits and exposure to a customer segment with modest credit profile that is highly vulnerable to the economic cycles.

The rating also takes note of the increase in the NPA during FY2015 (about 11.2 percent in September 2014), the same however has moderated to reasonable levels as in March 2015 (4.1 percent).

ICRA Lanka notes that the company’s asset quality is subdued as compared to in the past and also notes the limited seasoning of the Microfinance (MF) and MF-related SME, however the strong provision coverage (about 88 percent as in March 2015) and good profitability indicators is expected to support the overall financial profile of the company.

CCF’s gross lending portfolio increased to about Rs. 48.3 billion as of March 2015, recording a 79 percent Y-o-Y growth.

ICRA Lanka takes note of the weakening in the asset quality indicators during FY2015 due to the increase in the delinquencies witnessed in the pawing portfolio.

The company’s gross NPAs increased from about 2.5 percent in March 2013 to as high as about 11.2 percent in September 2014 before moderating to about 4.1 percent in March 2015. CCF’s provision coverage however is strong at about 88 percent in March 2015 although the same moderated from over 100 percent in March 2013.

The Company recognized losses to the extent of Rs. 520 million on account of auctions in the pawning book during FY2015 and reduced the share of the pawning book during the period. ICRA Lanka notes that the company could be faced with further slippages in the pawning book, however the impact of the same is expected to remain moderate as compared to in the past.

The rating takes note of the moderate NPAs in the MF/ MF-related SME loans, which stood at about 1.3 percent as in March 2015, however the same has been increasing over the past; also the company has repossessed stock of about Rs.600 million as in March 2015. Notwithstanding the healthy provision coverage, ability of the company to reduce losses on sale of these stocks and, to contain NPAs in the MF/MF-related SME loans at reasonable levels, as the business expands and portfolio seasons would be a key monitorable from a credit perspective.

The company is largely dependent on deposits, which accounted for about 87 percent (81 percent being fixed deposits) of the total funding base as in March 2015.

The healthy yields on the loans coupled with the moderation in the cost of funds has helped CCF to maintain robust lending spread of about 20 percent for the last three financial years.

Operating cost of the company has come down over time to 9.3 percent in FY2015 as compared to 11.0 percent in FY2014 due to the steep portfolio growth, although the company has been increasing its service network quite sharply (43 locations added in FY2015 to increase presence to about 118 locations).