Dec 10, 2010 (LBO) - Fitch Ratings Lanka has confirmed Central Finance Company's (CF) National Long-term rating at 'A+(lka)' with a stable outlook, a statement said.
The agency has also assigned an 'A(lka)' rating to CF's proposed subordinated debt issue of 500 million rupees with a tenor of five years.
The subordinated debentures, in terms of priority, will rank below deposits and all senior debt obligations, but above ordinary and preference shares.
Consequently, and in accordance with the agency's criteria, it said the rating assigned for the subordinated debentures is one notch lower than CF's implied senior debt rating of 'A+(lka)'.
"CF's ratings factor in its relatively good financial profile in the Registered Finance Company (RFC) sector in Sri Lanka," the statement said.
"The ratings also take into account CF's lack of product and funding diversity in relation to banks, an inherent limitation of the RFC business model."
Fitch said an upgrade of CF's rating depends on increased diversity of its funding sources and access to capital markets commensurate to 'AA(lka)'-rated peers.
It also depends on strengthening of market share of the finance company's core operations, while sustaining healthy asset quality and profitability.
"Conversely, a downgrade could occur in the event of a sustained weakening of CF's asset quality or profitability."
CF's loan book grew by 11 percent in the six months to end-September 2010 (H111) as the demand for vehicle leases increased following the end of the island's 30-year ethnic war in 2009.
Vehicle finance (leases and hire purchase agreements) accounted for 94 percent of the loan book, with the balance for loans to the SME sector and inter-company loans.
CF is also the largest provider of operating leases, primarily to manage vehicle fleets of corporate clients.
The bulk of CF's asset book was funded by time deposits (51 percent of assets), with a 29 percent growth in 2010 from a year ago.
"The company's matching of interest rate sensitive assets and liabilities was good relative to peers," Fitch said.
CF also had interest rate swaps covering a billion rupees to mitigate interest rate mismatches at the end of the 2010 financial year.
Its statutory liquid-assets ratio remained strong at above 20 percent in the first half of the 2011 financial year.
CF's non-performing loans (NPLs) reduced in nominal terms with its NPL/gross loan reducing to 7.5 percent in H111 due to improving economic conditions and concerted recovery processes, Fitch said.
Vehicle segments that under-performed relative to CF's overall portfolio were financing of tractors, which accounted for four percent of vehicle financed.
CF's net NPL/equity ratio reduced to 9.8 percent in H111 from its peak of 30.5 percent in 2009 and was significantly better than the RFC sector's.
Fitch said CF's inter-company loans accounted for 3.6 percent of the loan book at H111, about half being to a real estate venture - Hedges Court Residencies.
"Due to sluggish demand, the sale of these apartments have been delayed, and CF has provided 119 million rupees for impairment in value by H111 on this exposure."
CF's net interest margins improved to 13 percent in H111 largely due to an overall reduction in cost of funds.
source - www.lbo.lk
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