Fitch downgrades Bimputh to B+; Outlook Negative

Fitch Ratings Lanka has downgraded Bimputh Finance PLC’s National Long-Term Rating to ‘B+(lka)’ from ‘BB-(lka)’. The Outlook is Negative. 

The rating action is driven by the deterioration of Bimputh’s credit profile, even though the action follows the recalibration of the Sri Lankan National Ratings scale. The recalibration reflects changes in the relative creditworthiness among Sri Lankan issuers following Fitch’s downgrade of the sovereign rating to ‘B-’/Negative from ‘B’/Negative on 24 April 2020.

The downgrade of Bimputh’s rating mainly reflects a further significant capital impairment resulting in losses at the pre-impairment operating profit level and increasing credit costs, which are significantly higher than our previous expectations.

The Negative Outlook reflects the possibility for further downside risks from the economic fallout from the coronavirus outbreak. The economic fallout is likely to exacerbate the capital impairment through further pressure on Bimputh’s already-weak profitability, and heightened risk to its funding profile.

Key rating drivers

Bimputh’s rating reflects its higher-than-peer leverage due to weak capitalisation and profitability, and increased pressure on funding conditions. The rating also captures its weakening asset quality, which Fitch believes could intensify in the current challenging operating environment.

Fitch believes Bimputh’s current capitalisation and leverage is not commensurate with its high risk appetite stemming from its substantial exposure to microfinancing and SME lending, which tends to be more vulnerable to economic conditions. It sees a risk that Bimputh’s leverage – measureed by the debt/tangible equity ratio – may rise further to above 10x in the medium term if profitability remains weak, particularly in light of current adverse operating conditions. Bimputh’s leverage has already been on an increasing trend due mainly to continued losses in the financial year ended March 2019 (FY19) and 9MFY20, where the ratio spiked to 8.7x by end-3QFY20 from 4.6x at FYE18 (FYE19: 6.5x).

Furthermore, sharp erosion of Bimputh’s equity has widened the required new equity capital to meet the Sri Lankan regulator’s enhanced capital requirement of Rs. 2.5 billion by the extended deadline 31 December 2021. Fitch estimates that Bimputh requires around Rs. 1.6 billion to meet the final threshold, which is higher than our previous estimate of Rs. 1.35 billion at FYE19. It believes that the prospects of a capital infusion are hindered by the pandemic and Bimputh’s weak operating performance.

It expects Bimputh’s asset quality to weaken further on the back of economic fallout of coronavirus outbreak. Bimputh entered the crisis with a significantly weaker asset-quality position than its better-rated peers. Sharp accumulation of bad loans and contraction of the loan book pushed Bimputh’s reported six-month regulatory gross non-performing loan (NPL) ratio to 27.6% by end-3QFY20 – the weakest NPL ratio among Fitch-rated peers – from 16.8% at FYE19. Loan-loss allowance coverage remains weak, covering around 56% of NPLs and exposing Bimputh to greater provisioning risk.

Bimputh’s profitability is likely to remain negative in the short to medium term, due to weak pre-impairment operating profits (PPOP) and rising credit costs, putting pressure on the company’s thin capital buffers. Pressure on loan growth and declining interest rates has squeezed Bimputh’s PPOP buffers, reducing its ability to absorb rising credit costs. Consequently, Bimputh’s pretax return on assets ratio further weakened to -6.2% by end 3QFY20 from -3.5% at FYE19.

Fitch expects Bimputh’s weak financial profile and the current stressed market conditions to weigh on its funding and liquidity profile. Bimputh’s share of unsecured debt in its funding mix continued to decline alongside a contracting deposit base, further reducing its financial flexibility. The Central Bank of Sri Lanka (CBSL) has imposed regulatory sanctions on Bimputh by way of a deposit cap of Rs. 2.05 billion due to the non-compliance with the interim minimum capital requirement.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Positive rating action appears unlikely in the near term in light of the ongoing macroeconomic pressure and our expectation of further deterioration in the company’s credit profile. In the longer term, an upgrade is contingent on a sustained improvement in Bimputh’s credit metrics, especially its capital buffers, to be more commensurate with its risk appetite, stronger pre-impairment profit and better asset quality through an economic cycle.

The Outlook would be revised to Stable if Fitch assesses that the downside risks to Bimputh’s credit profile have abated, especially where there is structural improvement in profitability and normalisation of asset quality, reducing pressure on its capital buffers.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Further capital impairment due to sustained deterioration of profitability and asset quality, in the absence of a material capital infusion, may trigger negative rating action. The inability to raise new capital to meet regulatory requirements could also lead to operational and funding-access constraints that would be negative for the rating.

A deposits cap of Rs. 2.05 billion has been placed by the CBSL until Bimputh meets the required core capital as per the CBSL Direction No. 02 of 2017 – Minimum Core Capital.

The ‘Issuer Disclosure on Regulatory Action’ sub-heading was provided by the issuer and is included pursuant to applicable regulatory requirements. Fitch Ratings Lanka is not responsible for the contents of such information.