Fitch affirms LB Finance’s National Rating at ‘BBB+(lka)’; Outlook Stable

Fitch Ratings has affirmed Sri Lanka-based LB Finance PLC’s National Long-Term Rating at ‘BBB+(lka)’. The Outlook is Stable.

The rating reflects LB’s intrinsic financial strengths, which are driven by better profitability and asset quality than those of peers. These are counterbalanced by a greater exposure to market risk due to a significant gold-backed lending business. The rating also reflects the company’s established domestic franchise as Sri Lanka’s second-largest finance and leasing company (FLC), the rating agency said.
“The operating environment for Sri Lanka’s FLCs continues to stabilise, with improving GDP growth (1H24: 5.0 percent yoy; 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,” said Fitch.

Fitch said it expects the stabilising operating environment to support LB’s ability to generate and defend business volumes, particularly in its core products of vehicle-backed financing and gold loans. Vehicle financing made up 48 percent of gross loans at the end of the financial year March 2024 (FY24), compared with 47 percent at FYE23 and 57 percent at FYE22. 

Its expansion should be supported by a potential removal in vehicle import restrictions. Gold loans’ share of 44 percent of the book (FYE23: 44 percent, FYE22: 32 percent) is likely to moderate marginally over the medium term as vehicle financing picks up.

It added that its view of LB’s risk profile reflects its greater exposure to gold-backed lending, which exposes it to the risk of adverse gold price movements. Increased industry competition in gold-backed lending has placed incremental pressure on FLCs underwriting metrics - such as loan-to-value ratios and loan tenures - although LB has been able to manage the product risk and asset quality fairly well through established monitoring and control mechanisms.

The company has enhanced its underwriting models, which could be positive for its risk profile. However, the effectiveness of these recent measures is yet to be tested over time.

Fith said it expect planned loan-book growth and continued recovery efforts to support LB’s asset quality as the economy stabilises. LB’s gross impaired (stage 3) loans ratio of 4.1 percent at FYE24 (FYE23: 8.6 percent) - the lowest among Fitch-rated peers - remains underpinned by its gold-backed loan portfolio. 

“We expect it to maintain stable asset quality in the absence of a major gold price shock. We estimate the company’s impaired loan ratio to remain below the sector average even excluding the gold loans,” said Fitch.