Fitch assigns Ideal Finance’s ‘B+’ rating; Outlook Stable

Fitch Ratings Lanka has published Ideal Finance Ltd.’s National Long-Term Rating at ‘B+(lka)’ with a Stable Outlook. 

Key rating drivers 

Ideal Finance’s rating reflects its small and developing franchise and limited operating history. The rating also captures the company’s high-risk appetite with significant exposure to the more-vulnerable consumer segment and non-core real-estate investments. 

Fitch sees the company’s exposure to real-estate investments – which constituted 14% of equity at the end of the financial year ended March 2018 (FYE18) – as risky due to their cyclical nature. Fitch expects Ideal Finance’s large unseasoned loan book to continue exerting pressure on asset quality, following rapid loan growth over the previous few years. The gross regulatory non-performing loan ratio of 1.5% at FYE18 was better than that of higher rated peers. 

Fitch expects the company’s leverage ratio of 1.9%, as measured by debt/tangible equity, to be pushed up in the medium term by sustained strong loan growth, which is insufficiently supplemented by internal capital generation, although it was better than that of higher rated peers. 

Fitch expects capital support from Ideal Finance’s main shareholders – Aravinda De Silva and Nalin Welgama – to help the company meet the enhanced regulatory minimum capital requirement of Rs. 1.5 billion by end-2019. 

Ideal Finance relies on bank borrowings and equity to fund its operation. It has a small and concentrated deposit base, which accounted for 19% of total funding in FY18, owing to its short operating history, having commenced operations in 2012. The company accounted for less than 1% of total non-bank financial institution sector assets in FY18, with vehicle financing making up around 80% of its total gross loans. 

Rating sensitivities 

An increase in Ideal Finance’s operating scale, while maintaining commensurate asset quality and capitalisation, as well as sustained improvement in core profitability, could lead to a rating upgrade. 

Significant deterioration in asset quality that reduces the company’s loss absorption buffer could lead to a rating downgrade. An increase in risk appetite through, for instance, an aggressive ramp-up in real-estate investments, could trigger a rating downgrade.