Fitch affirms Abans Finance at ‘BB+’; Outlook stable

Tuesday, 14 August 2018 00:00 - - {{hitsCtrl.values.hits}}

Fitch Ratings Lanka has affirmed Abans Finance PLC’s national long-term rating at ‘BB+ (lka)’. The outlook is stable.

Key rating drivers

The affirmation reflects Fitch’s view that support would be forthcoming from parent Abans PLC (BBB+(lka)/Stable), based on Abans’ majority 49.7% equity stake, involvement in Abans Finance’s strategic direction through board representation, a common brand name and demonstrated support through past equity injections.

Abans Finance is rated three notches below its parent because of its limited contribution to the group’s core businesses. The company financed less than 1% of Abans’ consumer durables revenue in the financial year ending March 2018 (FY18). It mainly provides vehicle financing, with 47% of its lending channelled through the sales of two-wheelers by Abans Auto Ltd., a company owned by Abans’ shareholders but positioned outside of the Abans group. Abans Finance also only contributed 5% of group revenue and 9% of group operating profit in FY18.

Abans Finance’s standalone rating is weaker than its support-driven rating due to weak asset quality - a reflection of the company’s high-risk appetite with significant asset concentration in two-wheeler financing that is more vulnerable to the economic cycle. Fitch expects persistent asset-quality pressure, stemming from a challenging operating environment. The company’s asset quality metrics were weaker than those of similarly rated peers, with a reported regulatory gross non-performing loan ratio of 10.9% at FY18, significantly above the 5.8% industry average.

Abans Finance’s capitalisation improved following multiple equity infusions by Abans and its second-largest shareholder, Ironwood Investment Holding Ltd. in FY17 and FY18, which saw the company’s debt/tangible equity ratio fall to 4.6x in FY18 from 5.1x in FY17 (FY16: 8.6x). It is expected that Abans Finance will meet its target of an enhanced regulatory minimum capital requirement of Rs. 1.5 billion by end-2018. However, Fitch expects earnings retention alone is likely to be insufficient to achieve the regulatory minimum capital requirements of Rs. 2.5 billion by end-2020.

Rating sensitivities

Weakening links with the parent, including declining parental control or importance to the group, or a downgrade of Abans’ national long-term rating, could trigger a rating downgrade on Abans Finance.

Fitch believes the possibility for a rating upgrade is most likely to result from an upgrade of Abans or a significant increase in Abans Finance’s strategic importance to its parent. However, a change in the near term is not expected.