Fitch revises Bimputh Finance’s Outlook to Negative

Fitch Ratings Lanka has revised the Outlook on the National Long-Term Rating of Bimputh Finance PLC (Bimputh) to Negative from Stable. At the same time, the agency has affirmed the National Long-Term Rating at ‘BB(lka)’. 

The Outlook revision reflects the finance company’s high capital-impairment risk arising from declining pre-impairment operating profit buffers amid a weakening in asset quality, reducing its capacity to absorb credit-cost shocks. The revision also captures potential pressure on Bimputh’s financial profile from increasing exposure to the non-microfinance business as the company is still developing risk controls in this segment. 

Key rating drivers 

• National ratings 

Bimputh’s rating reflects its high-risk appetite stemming from its substantial exposure to microfinance, which accounted for 50% of total lending at end-June 2018. The higher-yielding microfinance segment tends to be more vulnerable to economic changes. Fitch expects microfinance to remain a dominant product for Bimputh although lending to this segment has declined. 

The rating also captures the company’s heavy reliance on borrowings and potential capitalisation drag from weakening credit quality and strong loan growth aspirations. 

Bimputh’s asset quality is likely to continue to be pressured by Sri Lanka’s challenging operating environment. The company’s reported non-performing loan (reported on a six-months-in-arrears basis) ratio rose to 6.4% by end-March 2018 from 3.0% a year earlier. This was despite a 5.7% net charge-off of average gross loans for the financial year ended March 2018 (FY18). 

Fitch expects Bimputh’s medium-term profitability to remain weak, weighed down by high credit and operating cost burdens and a lower share of high-yielding microfinance. The company’s pretax profit to average assets declined to 3.0% in FY18 from 9.7% in FY17. 

Bimputh’s weak deposit franchise means it remains reliant on wholesale borrowings. The company’s deposit base is highly concentrated and stayed small at 26.9% of total funding at end-March 2018.  Bimputh is a small finance company accounting for 0.7% of licensed finance-company and specialised leasing-company sector assets at end-March 2018 (March 2017: 0.9%). 

• Rating sensitivities 

Weakening in its capitalisation metrics due to aggressive loan growth and deterioration in credit quality may trigger a negative rating action. 

An upgrade is contingent on a sustained improvement in credit metrics – in particular capitalisation – and a moderation of its risk appetite.