Fitch affirms Fintrex Finance at ‘B(lka)’; Outlook Stable

Monday, 15 July 2019 00:00 - - {{hitsCtrl.values.hits}}

Fitch Ratings Lanka has affirmed Fintrex Finance Limited’s National Long-Term Rating at ‘B(lka)’. The Outlook is Stable.

Key Rating Drivers

Fintrex’s rating reflects its high risk appetite, which stems from its large exposure to the riskier segment of the finance and leasing market, evolving underwriting standards and risk controls, and aggressive growth aspirations. The rating also captures Fintrex’s modest capital base, heavy reliance of secured funding and its small franchise.

Fintrex is likely to experience more asset-quality pressures in the medium-term in light of its aggressive loan growth in the financial year ended March 2019 (FY19), against the backdrop of a weak operating environment due to an economic slowdown. Fintrex’s reported non-performing loan ratio (greater than 180 days overdue) increased sharply - a trend across the finance and leasing sector - to 7.7% in FY19 (FY18: 5.7%).

We regard Fintrex’s absolute capital base as small, but we expect Fintrex will receive additional capital from its main shareholder - Bluestone1 Private Limited - to meet the enhanced minimum capital requirement of LKR2.5 billion by 1 January 2021. We estimate that Fintrex would require at least another LKR1 billion and its internal capital generation is unlikely to be sufficient to meet the threshold. The company’s debt/tangible equity ratio of 4.1x at end-FY19 remained better than similar-rated peers. Still, the ratio could increase in the medium-term as the company executes its ambitious expansion.

Fintrex’s pre-tax net income/average assets ratio of 4.0% at end-FY19 was lower than better-rated peers, but has improved over the last few years as interest margins widened. However, profitability could come under pressure from rising credit costs through asset-quality pressures.

Fintrex in FY19 shifted towards a high reliance on secured funding, which will limit the company’s financial flexibility, especially in distressed-market conditions The changes in its funding profile highlights potential funding vulnerabilities. Its unsecured debt/total debt declined to 17.7% by end-FY19 from 67% at end-FY18.

Fintrex is one of the smallest finance and leasing companies in Sri Lanka, accounting for only 0.6% of total sector assets at end-FY19.

Rating Sensitivities

Fintrex’s rating could be upgraded if the company increased its operating scale while maintaining asset quality and capitalisation at levels of higher-rated peers. However, a significant reduction in loss absorption buffers owing to asset-quality slippage could lead to a rating downgrade. A further weakening in the funding and liquidity profile, such as no new capital, would also pressure the rating.