Fitch affirms Central Finance’s National Long-Term Rating at ‘A-(lka)’

Fitch Ratings has affirmed Sri Lanka-based Central Finance PLC’s (CF) National Long-Term Rating at ‘A-(lka)’. The Outlook is Stable.
CF’s rating is driven by its standalone credit profile, characterised by capitalisation above the industry average, stronger asset quality and profitability and lower leverage than that of other Fitch-rated standalone peers. 
Conservative lending in recent years has helped to preserve CF’s financial performance and liquidity buffers amid a challenging operating environment despite its share of industry assets decreasing to 5.7 percent by the end of the financial year to March 31, 2024 (FYE24), from 7.3 percent at FYE21.

“The operating environment for Sri Lanka’s finance and leasing companies (FLCs) continues to stabilise, with improving GDP growth (1H24: 5.0 percent year-on-year; 2023: -2.3 percent), normalising inflation and reduced market interest rates. This should support the sector’s credit growth, asset quality and profitability. A gradual easing in vehicle import bans may further underpin growth, albeit with some collateral value risk, “ the rating agency said. 
CF is a significant player in the registered vehicle financing market, with motor cars and vans constituting majority of its gross loans. Fitch expects CF to remain focused on vehicle financing with no plan to enter gold-backed lending in the near to medium term. The company is likely to resume loan growth as the economy improves but this may occur gradually as the company rebuilds its marketing and distribution capacity after a period of reduced lending, Fitch said. 
CF maintains a conservative risk profile with a limited growth appetite, large capital buffers and over 95 percent of total loans secured by motor vehicles, primarily cars. It has not ventured into gold loans to spur growth despite its declining market shares. CF has strengthened risk controls to manage asset quality in the past two years. It also maintains an average loan-to-value ratio of around 65 percent, providing a buffer against potential vehicle price corrections in the event of further relaxation in vehicle imports.
“We expect CF’s stage three ratio to remain below the industry average in the near term, supported the company’s relatively conservative risk appetite in recent years,” 
Fitch said. 

CF’s stage three non-performing loan ratio declined significantly to 6.5 percent by FYE24, from 10.2 percent at FYE23, due to its effort to improve recoveries despite a tightened regulatory definition from 120 days past due (dpd) to 90 dpd. CF’s relatively high provision coverage ratio also provides a buffer against future impairment.