Fitch upgrades Ideal Finance to BB-; Rating Watch Positive

Fitch Ratings Lanka has upgraded Ideal Finance Limited’s National Long-Term Rating to ‘BB-(lka)’, from ‘B+(lka)’. 

The rating is on Rating Watch Positive (RWP). The upgrade is supported by an improved credit profile, but follows the recalibration of Sri Lanka’s national ratings scale to reflect changes in the relative creditworthiness of Sri Lankan issuers after Fitch downgraded the country’s sovereign rating to ‘B-’/Negative’, from ‘B’/Negative, on 24 April. 

The upgrade reflects improved capitalisation following the introduction of new capital after an initial Rs. 1.1 billion investment in February 2020 from India’s Mahindra & Mahindra Financial Services Ltd. (MMFSL). 

This strengthens the company’s standalone profile and bolsters loss-absorption buffers against Sri Lanka’s challenging operating environment. 

The Central Bank of Sri Lanka has also removed the Rs. 700 million cap on total deposits due to Ideal’s compliance with the interim minimum capital requirement. 

The RWP reflects Fitch’s belief that Ideal’s rating could benefit from the change in shareholding and increased probability of support once MMFSL’s effective control is established in light of MMFSL’s potentially stronger credit profile. 

MMFSL will progressively invest Rs. 2 billion (approximately $11 million) to acquire a 58.2% stake in Ideal in three tranches up to 2021. 

Fitch expects the minimum regulatory capital requirement of Rs. 2.5 billion for finance companies to be met at the end of the transaction, at which point we expect MMFSL to have acquired effective control of Ideal. 

Factors that could, individually or collectively, lead to positive rating action/upgrade: We expect to resolve the RWP once we conclude our assessment of MMFSL’s ability to provide support to Ideal and have greater clarity on the linkages between Ideal and MMFSL. 

Fitch will maintain the RWP beyond the typical six-month horizon, with parental support likely to be factored into the rating once MMFSL has acquired effective control of Ideal. 

Fitch’s view of support will include an assessment the level of strategic importance of the Sri Lankan market and Ideal to MMFSL, the extent of integration, branding and provision of broader funding support. 

Fitch will remove the RWP if the investment is not completed. The rating would then remain driven by Ideal’s intrinsic credit profile. Factors that could, individually or collectively, lead to negative rating action/downgrade: Ideal’s rating is currently driven by its standalone profile. 

Negative rating action could occur if a severe deterioration in the operating environment, beyond our base-case expectations, were to diminish the company’s asset quality, profitability and capital adequacy, leading to downward pressure on Ideal’s standalone profile.