LRA reaffirms Trade Finance & Investments at BB+/NP

Lanka Rating Agency (LRA) has reaffirmed Trade Finance & Investments PLC’s (TFI) long-and short-term financial institution ratings at BB+ and NP.Concurrently, the ratings have been placed on a Rating Watch Positive. Meanwhile, the ratings are upheld by TFI’s above average asset quality, strong capitalisation and healthy performance.

The Positive Rating Watch is premised on the expected merger between TFI and Commercial Credit & Finance PLC (CCF) (rated BBB-/P3/Positive by LRA).In line with the Central Bank of Sri Lanka (CBSL) sector consolidation road map, CCF acquired 96.89 percent ownership of TFI in August 2014 from the previous owners. Subsequent to the acquisition, in accordance with the CBSL road map, TFI’s assets and liabilities are expected to be merged with CCF, where CCF will be the surviving entity. Following the amalgamation of assets and liabilities of TFI with CCF, the credit profile of the liabilities of TFI would be enhanced to the higher rated parent’s credit profile. 

 
TFI’s asset quality is viewed to be above average, owing to asset quality indicators that compares better than licensed finance company (LFC) sector peers’. TFI’s asset base expanded at a robust 40.25 percent year-on-year (YoY) in the FY March 2014 spurred by credit growth.The company’s credit assets are largely dominated by motorcycle and three-wheeler financing, both of which account for around 85 percent of total credit assets as at end-June 2014.

Meanwhile, TFI’s absolute gross non-performing loans (NPLs) increased 67.37 percent YoY in fiscal 2014, growing a further 56.73 percent in 1Q fiscal 2015 to Rs.50.53 million as at end-June 2014.Subsequently, TFI’s gross NPL ratio moderated to 4.20 percent as at end-June 2014 (end-March 2013: 2.72 percent). Despite the deterioration, TFI’s gross NPL ratio continues to compare better than that of its LFC industry peers.TFI’s performance is viewed to be healthy, upheld by performance indicators that compare better than LFC industry peers’. Mirroring robust credit expansion, net interest income expanded at a rapid 49.20 percent YoY in FY March 2014 to Rs.293.16 million (FY March 2013: Rs.196.49 million).In line with TFI’s focus on high-yielding segments such as three-wheeler and motorcycle financing, the company yields have consistently compared betterthan similar rated peers. As such, supported by its high-yielding loan portfolio coupled with its relatively lower cost of funding owing to a funding structure dominated by shareholders funds, TFI’s NIM have consistently compared better than similar rated peers’.
 

Reflective of the expansion in top-line, TFI’s pre-tax expanded at a robust 30.73 percent YoY in FY March 2014 to Rs.191.78 million (FY March 2013: Rs.146.70 million).Supported by its focus on high-yielding segments and its low-cost operating model, the company’s ROA has also consistently compared better than similar rated peers over the years. As such, the company’s ROA stood at 13.41 percent in FY March 2014 comparing well above its LFC industry peers’.

TFI’s liquidity position is deemed adequate. Its liquid asset ratio improved to 23.80 percent as at end-June 2014 (end-March 2013:20.06percent).Nevertheless, the company’s liquidity position is viewed with caution, given the significant liquidity risk faced by TFI in view of high depositconcentration, especially due to high amount customer deposits from related parties of the previous owners of TFI. However, if a liquidity need arises, support for TFI is expected to be forthcoming from its parent company CCF (BBB-/P3/Positive).TFI’s capital adequacy levels are viewed as strong. Its Tier I and Overall RWCAR stood at a good 56.73 percent as at end-June 2014, comparing well above other LFC industry peers’.