Prolonged ban on vehicle imports continues to dampen finance and leasing company earnings

• Predicts ban on vehicle imports likely to continue till end of 2022

The prolonged restrictions on vehicle imports will continue to dampen the growth and profits of the finance and leasing company (FLC) sector, which has already been grappling with a multitude of challenges, including degrowth and sour asset quality. 

According to Fitch Ratings, vehicle leasing accounted for around 53 percent of total loans of the FLC sector by the end of June 2021—down from 55 percent in FYE 2019— but the actual exposure would be higher as a significant share of term loans is also backed by vehicles as collateral. 

“Restrictions on vehicle importation will continue to constrain the growth prospects of Sri Lankan FLCs, dampening prospects for the sector’s earnings,” the rating agency said in a note last week. 

Reflecting the prominent role played by vehicle financing, Fitch estimated the sector loans had fallen by 2.2 percent in the June 2021 quarter from a year ago, marking the fifth consecutive quarter of contraction in loans.  
The ban sent the prices of the existing vehicle stock soaring, reducing affordability, a condition, which Fitch believes, would “most likely weaken the demand for vehicle financing”.

“The higher prices have supported loan recoveries from repossession in the near term but may expose FLCs to unexpected sharp price corrections,” it added.  Sri Lanka banned vehicle imports since March 2020 to ease the excessive pressure on its already low foreign exchange reserves coming from the slowdown in inflows as a result of the pandemic-induced disruptions to the country’s key foreign exchange sources such as tourism, 

direct inflows and exports. While the restrictions on vehicle imports initially appeared to remain for a short period of time and then to be gradually phased out by 2021-end with the economic normalcy returning now appears to stretch at least until the end of 2022, according to Fitch’s expectations. 

The new Central Bank Governor Ajith Nivard Cabraal last week told that he would soon unveil an economic stabilisation road map, which would likely provide cues when the government would phase out the current restrictions on imports and other current and capital account restrictions to provide the economy with the much-needed predictability and instil confidence.  The FLC sector players remain more vulnerable compared to their banking sector counterparts, due to their less diversified loan portfolio, sour asset quality and their exposure to borrowers, who are more susceptible to economic shocks with relatively less shock absorption capacity. The sector non-performing loans over six months was reported at 13.0 percent by the end of June 2021, nearly double the 7.7 percent in FYE 2019. 

Further, FLCs’ profitability, measured by the annualised return on assets, has also narrowed to 1.8 percent in June 2021, from 2.8 percent in FY19, due to higher credit costs and the decline in the top line revenue, stemming from the lack of portfolio growth.   However, Fitch said the capitalisation and liquidity metrics remained relatively stable due to limited growth opportunities.  “We believe Fitch-rated standalone FLCs largely possess adequate profit and capital loss absorption buffers relative to their rating levels to absorb higher credit costs, with the exception of Bimputh Finance PLC (B-(lka)/Rating Watch Negative). Its sustained losses continue to erode its capital base.” “Still, FLCs’ credit profiles are highly susceptible to the strength of the economic rebound, which could determine their ability to arrest deterioration in asset quality,” the rating agency added.