Fitch says rising NPLs to weigh on finance companies’ credit profiles

Fitch Ratings yesterday warned that Sri Lankan Finance and Leasing Companies’ (FLCs) credit profiles are likely to remain under pressure in the medium term due to the high asset-quality risks and weakening profit buffers amid a prolonged slowdown in economic activity.

“We see capital-impairment risk as more acute across the small- to mid-sized FLCs due to pre-impairment operating profit buffers which are already weak; a small absolute capital base; and a high share of unprovisioned non-performing loans (NPLs),” Fitch said. The large FLCs are likely to withstand the asset-quality risk, underpinned by their solid capital buffers, it added. 

Asset-quality pressure is likely to persist into FY20. Furthermore, higher credit costs under IFRS 9 amidst rising NPLs would remain a drag on FLCs’ profitability in the medium term. This is likely to become a further burden on FLCs that require additional capital to meet the Sri Lankan regulator’s enhanced capital requirement of LKR2.5 billion by 1 January 2021. It exposes these companies to regulatory risks, which include deposit caps, lending caps and issuance of Notice of Cancellation of the License by the Central Bank of Sri Lanka.

The ratings of standalone-driven Fitch-rated FLCs in Sri Lanka are more susceptible to significant capital impairment risk - among other things - as a result of a sustained deterioration in asset quality. Therefore, an inability to arrest further slippage in asset quality could exert downward pressure on their ratings - as reflected in the rating sensitivities.