Fitch upgrades Singer Finance to 'BBB+'; Outlook Stable

Fitch Ratings Lanka has upgraded Singer Finance (Lanka) Limited's (SFL) National Long-term rating to 'BBB+(lka)' from 'BBB(lka)'. The Outlook is Stable.

The upgrade of SFL's rating follows the recent upgrade of its parent's - Singer Sri Lanka PLC (SSP) - National Long-term rating to 'A(lka)'/Stable from 'A-(lka)'/Stable, and reflects the increased level of support assumed to be available from SSP and the perceived strategic importance of SFL to its parent. The upgrade of SSP's rating is driven by its improved liquidity and credit metrics, as well as its improved competitive position and revenue potential emanating from revised tariff structures and opening of new geographical areas in the current post-war environment. The two companies share the 'Singer' brand; and SFL provides consumer financing for SSP's locally assembled products which comprise a significant portion of SSP sales. SSP infused LKR200m of equity into SFL in October 2009 and channelled LKR911m of borrowings at end-September 2010 to support SFL's portfolio growth. SFL contributed 24% of SSP's pre-tax profit for the nine months ended September 2010 (2009: 30%).

SFL's lending portfolio grew 7.9% in the six months ended 30 September 2010 (H111) driven by a 27% growth in its vehicle finance segment following improvements in the overall credit environment. The consumer finance portfolio channelled from SSP - main contributor to growth as at end-March 2010 (FY10) - stabilised at around LKR1.4bn at end-H111 and accounted for 39% of total advances. SSP manages this consumer durable portfolio for a fee, and so far has managed to keep NPLs low (end-H111gross NPL ratio: 1.1%). The gross NPL ratio on SFL's vehicle finance portfolio (58% of advances) fell to 4.0% at H111 (FYE10: 5.7%) and compared well with peers' (registered finance companies rated by Fitch: 12.9% at FYE10).

This is largely a function of the company's conservative underwriting standards as well as its close monitoring and follow-up processes.

SFL's profitability improved in FY10, supported by wider net interest margins (NIMs) and lower incremental provisioning costs. Its operating costs are significantly higher than peers' due to fees and cost re-imbursements made to SSP for managing its 'Singer' consumer finance portfolio. Operating costs increased to 11% of average assets in H111 (FY09: 7%). However, the impact on profitability was offset by SFL's high NIMs which benefited from the high yields from its consumer finance portfolio. Despite the steep fall in funding costs in FY10 and H111 - as more deposits were re-priced downwards and borrowings costs fell in line with market rates, SFL maintained interest yields at high levels and NIMs widened to 19.4% in H111 (FY10: 14.4%, FY09: 9.9%).

SFL's funding is largely from deposits (48% of assets at end-H111); however, borrowings from its parent funded its consumer durable portfolio. Although equity-funded assets were lower than the sector, Fitch notes that the company has a comfortable capital buffer to meet potential loan losses from un-provided for NPLs (end-H111 net NPLs/equity: 6.9%). The company hopes to raise LKR400m of equity through a listing of its shares on the Colombo Stock Exchange in December 2010. This will dilute SSP's holding in SFL to 75%.

SFL's rating is linked to that of SSP and contingent on the support assumed to be available from SSP. Therefore, any changes to the implied support from SSP or in the strategic importance of SFL to its parent could trigger a rating action.

SFL is a registered finance company and a fully-owned subsidiary of SSP. It has a network of six branches and six service centres in Sri Lanka.

source - www.dailymirror.lk