Fitch cuts Singer Finance rating on weakening parental support

• Remains sanguine about medium-term profitability and loan growth on declining rates  

Fitch Ratings recently cut Singer Finance Lanka PLC’s (SFL) rating to BBB, from BBB+, as the rating agency believes that its parent company Singer Sri Lanka PLC’s ability to support the former is weakening, after the consumer durables juggernaut saw its own rating being cut about a week ago. 

Fitch downgraded Singer Sri Lanka’s rating by a notch on November 29 to A, from A+, due to sustained deterioration in the Singer’s financial profile, as the market leader in consumer durables is experiencing a prolonged weak demand, due to weak consumer spending on non-essentials and the slow recovery in the margins among other things. 

Singer has an 80 percent stake in Singer Finance. 
“We also believe support from the parent could be constrained by SFL’s significant size relative to Singer, as its assets represented 41 percent of group assets at end-September 2023,” Fitch said of Singer Finance, announcing the rating downgrade.

However, the outlook was left ‘Stable’, similar to its parent Singer Sri Lanka’s rating revision last month, to reflect the latter’s adequate liquidity, supported by its access to domestic banks and also on the expectation for EBITDA to recover gradually in the next two years, supported by the slow improvement in demand, amid falling interest rates and lifting of the ban on consumer durable exports since October.

Singer Finance, with an asset base of Rs.33.5 billion, has a sizable vehicle loans business, which accounted for 69 percent of the lending portfolio by the end of June and gold-backed loans have seen a sharp expansion during the last few quarters, reaching 28 percent of the company’s portfolio, due to lower demand for vehicle financing.
The company’s asset quality became weaker as the so-called stage three loans rose to 11.9 percent in the financial year ended in March 2023, from 6.6 percent in the previous financial year. 

According to Fitch, the sharp deterioration in the asset quality was due to weaker collection in its core vehicle loans segment and the implementation of stricter stage three recognition rule. 
While Fitch expects the asset quality to remain stressed in the medium term, due to the weak economic environment, the collections could increase as borrowers’ repayment capability improves, if the economy gradually stabilises with the declining inflation and interest rates. 

Although the rating agency expects the downside risks in the economy to moderate after Sri Lanka completed the local currency debt optimisation, addressing one element of risk to financial system funding and liquidity, it expects the operating environment to remain challenging, due to stretched household budgets and fragile investor confidence.

Fitch expects the Sri Lankan economy to contract by 1.3 percent in 2023 before modestly rebounding by 3.3 percent in 2024, indicating a gradual recovery.
Sri Lanka’s banking sector also looks past its peak in its problem loans after it hit little over 13.0 percent, as it now cautiously begins to reopen its lending spigots, after more than 18 months of remaining virtually closed for lending. 
Despite the risks, Fitch also expects Singer Finance’s profitability to recover on the back of expanding net interest margin in the medium term, in response to the declining interest rates. 

“This, along with a potential pick-up in loan growth, should support earnings and profitability but a strong loan expansion in the medium term could pressure leverage,” the rating agency said. 
In the six months to June 2023, Singer Finance reported a net profit of Rs.209.3 million, up 18 percent from the same period last year.