Parental support enhances Sri Lankan finance ratings: Fitch

Fitch Ratings shared that many Sri Lankan finance subsidiaries receive higher ratings due to expected parental support, which often results in ratings that surpass what their standalone performance would typically be.
Fitch’s non-bank financial institution (NBFI) shareholder support framework considers the parent’s ability and propensity to support its subsidiary. It uses the parent’s rating as an anchor, and the subsidiary’s strategic positioning is often a key rating influence.
”Fitch’s ratings on Sri Lankan shareholder support-driven finance and leasing companies (FLCs) reflect our view of their limited roles within their parent groups, considering their modest synergies and differing customer segments,” the rating agency said. 
It added that it views bank-supported FLCs as more strategically-aligned with their parents, sharing similar business models and regulatory oversight.

Corporate-supported FLCs exhibit varying degrees of strategic alignment and contribution to their parent’s business profiles. Indian NBFI-owned entities, in particular, tend to have more limited roles due to their separate jurisdictions, according to Fitch.
Weakening parent credit profiles and expanding subsidiary size can limit parental ability to provide support – as seen in the rating downgrades of some Sri Lankan support-driven FLCs in recent years. 
Fitch would interpret capital shortfalls at an FLC subsidiary that lead to regulatory business limitations as indicating weaker parental support.
Fitch rates 12 out of 19 Sri Lankan FLCs based on expectations of support from stronger shareholders, including local banks, conglomerates, and foreign NBFIs. The remaining seven FLCs are rated based on their standalone credit profiles.
Fitch does not rate any Sri Lankan FLCs under its NBFI government support framework.