Fitch affirms Abans Finance at ‘BB+(lka)’; Outlook Stable

Monday, 15 July 2019 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 the parent, Abans PLC (BBB+(lka)/Stable), if needed. Our expectation stems from Abans being the largest shareholder in Abans Finance, the parent’s involvement in strategic decisions through board representation and a common brand name.

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 2019 (FY19). It mainly provides vehicle financing, with 47% of its lending channelled through the sale of two-wheelers by Abans Auto (Pvt) Limited, a company owned by Abans’ shareholders but positioned outside of the Abans group.

Abans Finance only contributed 5% of group revenue and 7% of group operating profit in FY19. Our assessment of Abans Finance’s limited importance also incorporates its parent’s decreasing shareholding, which has fallen to 50%, from 89%, following capital infusions into Abans Finance (FY18: LKR277 million, FY17: LKR462 million) coming mostly via its private-equity investor.

Fitch believes earning retention alone will be insufficient to achieve the regulatory minimum capital requirements of LKR2 billion by end-2019 and LKR 2.5 billion by end-2020. In January 2019, the Central Bank of Sri Lanka had imposed a temporary cap on Abans Finance’s deposit base.

Abans Finance’s intrinsic financial strength is significantly weaker than its support-driven rating due to its small franchise, limited operating history and high-risk appetite. Its asset-quality metrics are the weakest of Fitch-rated peers, with a reported regulatory gross non-performing loan ratio over six months of 18.0% at FY19, significantly above the industry average of 7.7%.

Rating Sensitivities

Any reduction in perceived support from Abans through, for instance, further dilution in the parent’s shareholding to meet meet higher regulatory capital requirements or an increase in the scale of the business relative to the parent through organic or inorganic growth could be negative for its rating. The removal of parental support could result in a downgrade of the rating to Abans Finance’s Standalone Credit Profile, which is multiple notches below its current rating.

A downgrade of Abans’ National Long-Term Rating could also trigger a rating downgrade on Abans Finance.

Fitch believes the possibility of a rating upgrade would be most likely to result from an upgrade of Abans’ rating or a significant increase in Abans Finance’s strategic importance to its parent. However, we do not expect such a change in the near term.