Feb 01, 2011 (LBO) - Sri Lanka's People's Leasing Finance (PLF), a unit of Peoples Leasing Company by one notch to 'BBB(lka)' with a stable outlook, on expected support from its 'A(lka)' parent which owns 93 percent of the firm.
Fitch said support from the parent was now "more likely" than in the past as the parent's stand-alone financial strength has improved over the past year.
PLC also channels Islamic lending products via PLF, broadening the group's lending portfolio.
The ratings could be upgraded if there is a greater operational integration between PLC and PLF, or an increase in PLF's strategic importance to the PLC group -- measured by the proportion of deposit-funded group-assets -- while maintaining healthy asset quality and profitability, Fitch said.
A weakening of PLC's stand-alone financial position, or a perceived waning of PLF's strategic importance to PLC, could result in a downgrade of PLF's rating.
PLF's gross advances had grown 68 percent in the six months ended September 2010, driven by renewed marketing efforts amid improving economic activity.
By September PLF's advances consisted of lease and hire purchase contracts (76 percent) and sundry loans (24 percent), which are predominantly used for financing motor vehicles.
Fitch notes that on 49 percent of its sundry loans, the company would need to resort to legal recourse for the ultimate recovery of the asset, and is therefore more risky.
To reduce this risk, PLF maintains that such products are generally disbursed selectively to customers with good repayment records.
PLF's non performing loans (NPLs), at the regulatory six-month arrears level, have broadly remained stable in absolute terms between December 2008 and September 2010.
Gross six-month NPLs had fallen to 5.7 percent of gross advances, from 11.3 percent, on the back of strong loan growth during the period.
Fitch expects PLC's strong operational influence to continue to strengthen PLF's risk management processes and controls.
However, any compromise in lending standards amid the current high loan growth could weaken asset quality over the medium-term, as the portfolio seasons.
PLF's deposit growth outpaced loans up to September (+75 percent).
The company's average interest cost has reduced in line with market interest rates, while the average premium offered on deposit rates has narrowed compared to larger competitors', and is indicative of its improving deposit franchise.
By September PLF's deposits funded 6 percent of PLC group's assets (end-March 2010: 5 percent).
PLF's profitability as measured by return on assets (ROA) improved to an annualised 2.20 percent by September compared to -4.04 percent in 2010, helped by widening net interest margin and low credit costs.
The company received a capital injection of 567 million rupees in October 2010, which improved its regulatory capital adequacy ratio to over 15 percent, from a temporarily weakened 7.10 percent in September.
PLF is evolving into a mid-sized registered finance company, with a network of 23 outlets. By September 2010 the company had assets of 4.1 billion rupees.
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