Feb 03, 2011 (LBO) - Fitch Ratings Lanka has upgraded Vallibel Finance's (VFL) rating to 'BB-(lka)' from 'B+(lka)' with a stable outlook, a statement said."The upgrade of VFL's rating reflects sustained improvements in its credit metrics - in particular its asset quality, profitability and capitalisation," Fitch said.
It also reflects VFL's 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, the rating agency said.
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.
However, Fitch warned 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, Fitch said.
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 the first half of the 2010 financial year, VFL was able to post a return on asset (ROA) of 2.6 percent in the year, marginally lower than that the year before.
Its profitability (ROA) improved to 4.0 percent in the first half of the 2011 financial year, 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, as VFL's deposits re-priced faster than its leases and HPs, which are generally fixed for four years.
Fitch noted that margins should revert to previous levels in the 2012 financial year as VFL's lending products are gradually re-priced.
VFL's deposit growth of 40 percent in H1FY11 did not keep pace with the rapid loan growth during the same period, Fitch said.
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, Fitch said.
VFL raised 114 million rupees through an initial public offering of its shares in April 2010, diluting its parent's - Vallibel Investments (VIL) - stake to 72.87 percent.
Following the equity infusion, VFL's available capital buffer to meet potential loan losses improved to 23.6 percent at end-September 2010 and compares well with peers', Fitch said.
"Capital adequacy remained comfortable with the company maintaining a tier 1 capital adequacy ratio of 18.2 percent at end-September 2010," the agency said.
"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."
VFL is a registered finance company and is majority owned by VIL, which in turn is owned by high net worth businessman K D D Perera.
source - www.lbo.lk
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