LOLC Finance September quarter profit slips 4% as expenses surge, margins narrow

Lanka Orix Leasing group company, LOLC Finance PLC, saw its net profit for the quarter ended September 30, 2016 (2Q17) narrowing by 4.0 percent to Rs.391.5 million or 14 cents from a year ago as some unclassified direct expenses and the interest cost rose sharply, the interim results showed.  
The net interest income (NII) was slightly up by 8.0 percent year-on-year (YoY) to Rs.1.76 billion as the interest expenses rose by a faster 87 percent YoY to Rs.2.8 billion amid rising interest rates. But the corresponding interest income rose by only 46 percent YoY - roughly a half of the rise in interest expenses - to Rs.4.6 billion. 
This points to a squeeze in the margins of the business, which otherwise maintains healthy spreads as the licensed finance companies charge higher rates for their leases and loans than a bank does. 
Meanwhile, the company grew its deposits by a healthy Rs.9.0 billion or 15 percent during the six months to September amid fierce competition for funds between banks and other finance companies in a relatively illiquid market. 
The loans and leases grew by Rs.8.6 billion or 12.2 percent to Rs.79.1 billion. The factoring receivables grew by another Rs.3.1 billion to a total of Rs.16.7 billion.    
LOLC Finance is the second largest licensed finance company in Sri Lanka by assets with an asset base of Rs.121.9 billion after People’s Leasing & Finance PLC, which has an asset base of Rs.144.0 billion. 
Meanwhile, other operating incomes grew by 86 percent YoY to Rs.569.3 million for the quarter.  
The direct expenses excluding the interest expenses rose by 101 percent YoY to Rs.345 million while general and administrative expenses also rose by 38 percent YoY to Rs.756.7 million. 
The allowances made for possible bad loans grew by 11 percent YoY to Rs.286.5 million. 
Meanwhile, for the six months ended September 30, 2016 (1H’17), the company made a net profit of Rs.714.4 million or 26 cents a share, down 8 percent from a year ago. 
The NII was little up by 2.0 percent YoY to Rs.3.22 billion. 
The segmental information showed that the conventional financial services business had suffered a setback during the period as the before tax profit of the segment has come down from Rs.937.5 million to Rs.558.2 million for the first six months. 
The slowdown in the leasing business may have contributed to the poor performance as LOLC Finance thrived mostly on leasing business and vehicle leasing significantly slowed down during the period. 
Islamic Financial Services business meanwhile increased its contribution to the business as its before tax profit rose from Rs. 295.4 million to Rs.324.1 million. 
The factoring business turned a profit of Rs.122.4 million from a before tax loss of Rs.79.4 million during the same period last year. 
Besides the 90 percent stake held by Lanka Orix Leasing Company PLC in the company, Saakya Capital (Pvt.) Ltd and Satya Capital (Pvt.) Ltd held 4.57 percent and 1.86 percent stakes, respectively by the end-September 2016 being the other two largest minority shareholders.