Softlogic Finance back in black as company pivots to secured lending to tackle soaring NPLs

Softlogic Finance PLC returned to profit in the three months ended in September on very little provisions made for possible bad loans, after the company made a decision to curtail unsecured lending to small and medium enterprises, which caused severe stress on its asset quality and thereby its earnings for a considerable period of time. 

The company reported a net profit of Rs.21.66 million or Rs.24 cents a share in the July-September period, its fiscal second quarter, compared to a net loss of Rs.274.53 million in the corresponding period last year.

The company made net losses of Rs.912.15 million and Rs.333.96 million each during the previous two financial years ending in March 2021 and March 2020, predominantly due to the weaker asset quality and slowdown in growth. 

The pandemic further weighed on the performance, as 22 percent of its portfolio or Rs.4.0 billion was still under moratoria by August 2021. 

The company recorded a net interest income of Rs.289.19 million in the three months, up 156.6 percent from a year ago and recorded a pre-impairment operating income of Rs.340.28 million, up 129.8 percent but the made only a very little impairment provision of Rs.3.29 million in the quarter, compared to Rs.132.0 million in the same period last year. 

This could be attributable to the company’s pivot to secured lending consisting mostly of vehicle leasing, gold loans and factoring from its legacy unsecured lending portfolio, which consisted of SME loans, according to ICRA Lanka Limited.

By June 2021, the company’s gross non-performing loans ratio was at 37.1 percent, compared to the industry average of 13.0 percent. 
“The company had taken a decision to curtail all business/SME-related lending in FY2021,” ICRA 
Lanka said. 

“Hence, the business lending portfolio (consisting of unsecured working capital loans and mortgage loans) has moderated to around 35 percent of the total portfolio in Jun-21 vis-à-vis 40 percent in Mar-20 (55 percent in Mar-19),” it added. 

Further, the company has also ramped up its recoveries from its legacy portfolio. 

ICRA Lanka last week reaffirmed Softlogic Finance’s rating at BB-, with the outlook being revised to ‘Stable’, from ‘rating watch with developing implications’, considering the continuous capital support received from its parent Softlogic Capital PLC, elevating its capital adequacy levels above the minimum regulatory levels in October. 

The company, which was under the lending cap of Rs.18.5 billion imposed by the Central Bank, due to its below regulatory minimum capital adequacy levels, has it removed last month after the rights issue of Rs.2.2 billion in August 2021 and the Rs.900 million raised via a sub-debt issued through a private placement with Softlogic Capital in October, taking its total capital adequacy ratio above the regulatory minimum. 

ICRA Lanka estimated the company’s Tier I and total capital adequacy ratios to be at 8.0 percent and 13.5 percent, respectively by March 2022, placing above the regulatory minimums of 7.0 percent and 
11.0 percent. 

During the six months to September 2021, the company gave Rs.2.51 billion worth of leases but its loans and advances portfolio contracted by Rs.1.16 billion, reflecting the portfolio resetting exercise to tackle the elevated non-performing loans. 

Leasing and loans together made a portfolio of Rs.17.88 billion by September and the company has a total asset base of Rs.22.65 billion, up from Rs.20.87 billion in March 2021. 
The company has a deposit portfolio of Rs.13.96 billion, compared to Rs.14.56 billion in March 2021. 

The company in August announced that its planned merger between Abans Finance PLC was no longer being pursued. 
Softlogic Capital PLC has a 91.16 percent stake in Softlogic Finance PLC.