UB Finance gets Rs.2bn capital injection lifting restraints on company’s biz

• Despite recent improvements, the company’s asset quality still remains modest 

UB Finance Company Limited managed to get its lending and deposit caps lifted after its two key shareholders, Union Bank of Colombo PLC (UBC) and Shorecap II Limited together injected fresh capital worth Rs.2.0 billion in October via a rights issue. 

Mirror Business in August citing an ICRA Lanka Limited report said that UBC, which has 92 percent shareholding of UB Finance, could either dispose its subsidiary or infuse fresh capital prior to the Rs.2.5 billion minimum capital requirement due in January 2022.

The most recent capital injection also brought a new member to the Board of UB Finance representing TPG, a global private equity firm which is the controlling shareholder of UBC.  With the fresh equity injection, UB Finance now has a tangible net worth or minimum core capital worth of Rs.2,748 million, slightly above the regulatory minimum requirement of Rs.2,500 and earned a revision of its rating outlook to ‘Stable’ from ‘Negative’ by ICRA Lanka Limited, this week. 

The rating agency reaffirmed the company’s longstanding rating at BB while the company has made some advances in its performance since June, and in particular from October after the Central Bank removed the deposit and lending caps in place on the company for over two years. 

Despite some progress, the rating agency however noted that the company’s gross non-performing loans ratio remained at 15.87 percent by end of September 2021 in comparison to the 12.7 percent for the licensed finance company sector.

 
UB Finance Limited’s core capital levels fell below the regulatory minimum levels since March 2018 and capital adequacy requirements since January 2019, “due to the one-time IFRS 9 transition adjustment of Rs. 430 million, adjusted for FY2019, which had a significant impact on UBF’s overall capital position,” the rating agency said. As a result the company was under lending and deposit caps since January 2019 which was revised twice prior to the latest ones put in place in August 2020 of Rs.8.1 billion for lending and Rs.5.8 billion for deposits. 

But a rights issue put the two capital ratios—core capital ratio and the total capital adequacy ratio— at elevated 30.12 percent and 30.27 percent respectively, which removed the portfolio caps, unlocking portfolio growth.  
In comparison the regulatory minimums for the two capital ratios are 7.00 percent and 11.00 percent respectively. 
The company had a modest asset base of Rs.8.3 billion and a loan portfolio of Rs.7.6 billion by the end of September 2021. 

The company’s leases and vehicle-backed loans portfolio by September-end accounted for 43 percent of the total portfolio, followed by 21 percent of working capital loans, 13 percent of hire purchase loans and 10 percent of fixed deposit backed loans. 

Gold-backed loans accounted for another 8 percent of the company’s portfolio.  
“ICRA Lanka notes that, the overall profitability of the company was affected by the lending and deposit caps that were in place, during the last 2 years,” the rating report said. 

The company reported a profit after tax of Rs.2.0 million in the 6MFY 2022 on a net interest income of Rs.323 million compared to a full year loss of Rs.41 million and a net interest income of Rs.592 million in the FY2021. 
The company’s profits also received some tailwind from the declining cost of funds as low interest rates helped it to improve interest margins in the fiscal 6 months but the company’s ability to stretch its margins further going forward remains limited due to the uptrend in the interest rates in the economy.  

“Going forward, company’s ability to improve overall profitability by managing credit cost and operating expenses will be crucial, as the room for lending margin expansion will be limited,” ICRA Lanka noted.