company ratings

Vallibel Finance gets 'BB-(lka)'

Fitch Ratings Lanka has upgraded Vallibel Finance PLC's (VFL) National Long-term rating to 'BB-(lka)' from 'B+(lka)'. The outlook is stable.

The upgrade of VFL's rating reflects sustained improvements in its credit metrics - in particular its asset quality, profitability and capitalization - as well as its increased scale of operations, which Fitch believes would help strengthen the company's balance sheet over the medium-term. The Stable Outlook reflects Fitch's view that VFL would be able to maintain its financial profile over the medium-term, supported by ongoing improvements to its systems and processes and the improving economic environment.

VFL's asset quality, which had weakened in 2008-2009, showed continuous improvements from end-2009, aided by an improving macro-economy and increased recovery efforts. Its gross NPLs (arrears in excess of three months), which had reached their peak in end-September 2009, fell by 34 percent by end-September 2010.

This, together with aggressive loan growth, enabled the company to post a gross NPL ratio of 7.0 percent at end-September 2010 - an improvement from 11.2 percent at end-March 2010 (FYE10). However, Fitch cautions that as the loan book seasons, there could be an increase in NPLs.

Total advances grew 76 percent over September 2009-September 2010 on the back of VFL's branch expansion in 2009 and 2010. The company expects to migrate to a new operating system during 2011, which should enable it to more closely monitor its growing loan book. Loans comprised mainly hire purchase (HP) and lease facilities to individuals in the SME segment for the purchase of commercial and more recently agricultural vehicles.

Despite being faced with higher credit costs and narrowing margins in H1FY10, VFL was able to post a return on asset (ROA) of 2.6 percent in FY10, marginally lower than that in FY09 (2.7 percent).

Its profitability (ROA) improved to 4.0 percent in H1FY11, driven mainly by wider net interest margins (NIMs), though also benefiting from lower incremental provisioning costs and higher non-interest income. NIMs widened to 14.1 percent in H1FY11 (FY10: 11.6 percent), as VFL's deposits re-priced faster than its leases and HPs, which are generally fixed for four years. Fitch notes that margins should revert to previous levels in FY12 as VFL's lending products are gradually re-priced.

VFL's deposit growth of 40 percent in H1FY11 (FY10: 39 percent) did not keep pace with the rapid loan growth during the same period. Consequently, loans to deposits remained high at 132 percent at end-H1FY11. However, with its wider branch network, the company's deposit base should expand over 2011.

VFL raised Rs 114 million through an initial public offering of its shares in April 2010, diluting its parent's - Vallibel Investments Ltd (VIL) - stake to 72.87 percent. Following its equity infusion, VFL's available capital buffer to meet potential loan losses (net NPLs/equity) improved to 23.6 percent at end-September 2010 (FYE10: 51.8 percent), and compares well with peers'. Capital adequacy remained comfortable with the company maintaining a tier 1 capital adequacy ratio of 18.2 percent at end-September 2010.

Upside movement in VFL's rating would depend on it sustaining asset quality and profitability at levels seen in H1FY10, while also having available a healthy capital cushion to meet potential loan losses and continuing with ongoing improvements to its risk profile.

Fitch upgrades People's Leasing Finance to 'BBB(lka)'

Fitch Ratings has upgraded Sri Lanka's People's Leasing Finance Plc's (PLF) National Long-term rating to 'BBB(lka)' from 'BBB-(lka)'. The outlook is stable.

The upgrade reflects Fitch's view that support from its parent, People's Leasing Company Limited (PLC, 'A(lka)'/Stable, a 93 percent ownership), is more likely to be available than in the past. This is in turn premised on the agency's view that PLC's stand-alone financial strength has improved over the past 12 months.

Unlike PLC, PLF is licensed to mobilize public deposits, and therefore helps to diversify PLC group's funding base and reduce cost of funds. 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. Conversely, 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 grew by 68 percent in the six months ended September 2010 (6 m FY11), driven by renewed marketing efforts amid improving economic activity. At end-6 m FY11, 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 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 reduced to 5.7% of gross advances, from 11.3 percent, on the back of strong loan growth during the above 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 in 6 m FY11 (+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. At end-6 m FY11, 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 annualized 2.20 percent at end-6 m FY11 (FY10: -4.04 percent), helped by widening net interest margin and low credit costs. The company received a capital injection of Rs 567 million in October 2010, which improved its regulatory capital adequacy ratio to over 15 percent, from a temporarily weakened 7.10 percent at end-6 m FY11.

PLF is evolving into a mid-sized registered finance company, with a network of 23 outlets. At end-6 m FY11, the company's asset base stood at Rs 4.1 billion.

RAM reaffirms Arpico Finance ratings at BB and NP

RAM Ratings Lanka has reaffirmed Arpico Finance Company PLC's long-and short-term financial institutions ratings at BB and NP, respectively.

Concurrently, the outlook on the long-term rating has been revised from stable to positive. The positive outlook reflects the considerable improvement in the company's asset-quality indicators in recent years, despite the non-conducive economic climate. Arpico's ratings are supported by its better-than-average asset quality and adequate capital base.

Nevertheless, the ratings are weighed down by high overheads, which hinder Arpico's performance, and its small size.

Established in 1951, Arpico is the second-oldest registered finance company (RFC) in Sri Lanka. Despite its long operating history, the Company has remained small, accounting for less than 1 percent of the industry's total assets as at end-March 2010.

Arpico has maintained its better-than-average asset quality. The company's gross non-performing-loan (NPL) ratio eased to 3.08 percent as at end-August 2010, from 4.83 percent as at end-FYE March 31, 2009 (FY Mar 2009).

Its achievement in curtailing NPLs is even more impressive considering that its gross NPL ratio had climbed up to 32.01 percent as at end-FY Mar 2004.

Notably, Arpico has managed to improve its asset quality despite the harsh economic climate that prevailed over the last two financial years, during which most of its industry peers had reported worsening NPLs.

The Company's better showing is anchored by a reduction in absolute NPLs through its conservative lending, strengthened monitoring and recovery procedures as well as expanding loan portfolio. Adequate provisioning has permitted Arpico to also record a better net NPL ratio of 1.26 percent as at end-August 2010 (end-FY Mar 2009: 2.41 percent).

While its asset quality has ameliorated, Arpico's performance has still been hampered by rising overheads and lacklustre demand for real estate. The Company's cost-to-income ratio had been elevated to 94.35 percent as at end-FY Mar 2010 (end-FY Mar 2009: 90.48 percent).

Furthermore, overheads are expected to ascend in line with the opening of new branches. Nonetheless, RAM Ratings Lanka expects Arpico's performance to improve once the new branches break even.

Meanwhile, we opine the company's capital cushioning is adequate. The company's core and overall capital-adequacy ratios remained at a respective 14.83 percent and 17.51 percent as at end-FY Mar 2010, well above the minimum statutory requirements of 5 percent and 10 percent. RAM Ratings Lanka opines that Arpico's funding and liquidity levels are moderate; the company's deposit base had charted robust growth during the reviewed period. Nonetheless, aggressive loan growth has diminished Arpico's liquidity position, albeit it remains at manageable stance.

source - www.dailynews.lk