Finance companies less important to parents despite large shareholding: Fitch

Fitch Ratings last week showed that finance and leasing companies (FLCs), which are part of larger financial groups are less important to the parent due to limited synergies in products they offer, modest contributions to group top and bottom lines and their weaker performances. 

In an analysis carried out on eight of 17 Sri Lankan finance and leasing companies rated by Fitch Ratings, it has been found that despite the stronger ownership linkages between the parent and subsidiary, the role latter plays in the group is low and hence are typically rated two notches below the parent company’s rating. 

“As such, most of the FLC subsidiaries are notched twice or more from their respective parent’s ratings.

 Lower management or operational integration between parent and subsidiary also contributes to this assessment,” the rating agency said in their newest dashboard on the finance and leasing companies for the first quarter in 2021. 

This actually can be seen when visiting a bank branch and a branch of a finance company, which is a subsidiary of the same bank as they serve two different clienteles with different risk profiles. In practice, the finance company typically deals with relatively subprime borrowers, who are not always served by a bank, and hence the higher interest rates and higher non-performing loans in the former, relative to its banking counterpart. 

Currently the rating of finance and leasing companies with parent groups are driven by Fitch’s expectations of extraordinary support from their parent companies. 

“Our expectation of parental propensity to provide extraordinary support to FLC subsidiaries hinges on considerations of the parent’s ownership stake, the record of ordinary support and brand sharing, which could bring about reputational risk to the parent should the subsidiary default,” Fitch noted. 

The eight companies taken for the assessment were Dialog Finance PLC, AMW Capital Leasing & Finance PLC, Richard Pieris Finance Limited, Singer Finance Lanka PLC, CBC Finance Limited, HNB Finance PLC, Siyapatha Finance PLC and Abans Finance PLC.

Each company is respectively rated at ‘AA’ with a Stable outlook, AA- with a Negative outlook, AA- with a Stable outlook, A+ with a Stable outlook, A with Stable outlook for CBC, HNB Finance and Siyapatha and A with a rating watch evolving for Abans Finance PLC, the company, which was acquired by Softlogic Capital PLC and is being absorbed by Softlogic Finance PLC.

In November, last year, the Central Bank took regulatory measures to gradually reduce the shareholding in finance and leasing companies by their main shareholders, with the maximum shareholding being capped at 50 percent by 2033.

The finance and leasing companies in Sri Lanka are reeling with lower growth, profits and asset quality, a combination of conditions exacerbated by the pandemic.