RAM Ratings Lanka has reaffirmed Associated Motor Finance PLC’s respective long- and short-term financial institution ratings at BBand NP; the outlook on the long-term rating is stable.
The ratings are constrained by the company’s small size and concentration in motorcycle financing, a segment which is highly vulnerable to changes in the economic climate.
Nonetheless, the ratings are supported by AMF’s healthy profitability, good asset quality and capitalisation.
AMF is a family-held registered finance company incorporated in 1962. Despite its relatively long operating history, the Company has remained one of the smallest players in the RFC industry, accounting for only 0.35% of total industry assets as at end-March 2011.
AMF does not have a branch network and operates solely out of its Colombo head office. Furthermore, the company’s core business has been motorcycle financing, a relatively high-risk segment that is highly susceptible to economic downturns; it had accounted for 96.82% of AMF’s credit portfolio as at end-June 2011. AMF is estimated to hold around 7% of the motorcycle financing market.
While AMF is at a disadvantage due to lack of a branch network, it enjoys support from its loyal dealer base, which brings in new loan applications and supports collections and recoveries. AMF only provides financing in the Western Province.
Moreover, the Company has an agreement with the Commercial Bank of Ceylon PLC, Sri Lanka’s largest private bank, to utilise the latter’s branches to accept loan instalment payments for its customers’ convenience.
Despite mainly catering to a high-risk segment, AMF has maintained the quality of its portfolio at healthy levels relative to its peers, who usually experience high delinquencies in motorcycle financing.
During the year company’s gross nonperforming loans more than halved to Rs. 11.51 million from Rs. 25.06 million a year earlier; this coupled with good underwriting and loan growth at 83.76% year-on-year during FY March 2011 improved the gross NPL ratio to 1.71% as at end-FYE March 2011. The ratio is currently the lowest amongst its similar rated peers. However, its new loans are yet to season owing to the strong loan growth.
The company’s performance is viewed to be healthy. In line with the loan growth, AMF’s top line recorded a growth of 19.25% y-o-y in FY March 2011. Meanwhile, its Net Interest Margins and cost-to-income ratio outperformed its similar-rated peers.
Its NIM improved to 13.03% in FY March 2011 from 12.21% the previous year, supported by its high-yielding motorcycle loans and reduced interest costs; deposits reprice faster than loans in a receding interest rate environment. Also, the company’s NIMs are higher than its peers owing to the high proportion of equity in its funding structure.
Due to AMF’s low-cost model of operating out of one location and leveraging on its dealer network and Commercial Bank branches, its cost-to-income ratio has been better than its similar-rated peers. The ratio improved to 43.16% in FY March 2011 from 47.24% in FY March 2010, backed by the improved business volume and profitability. Consequently, the company’s pre-tax profits improved to LKR 81.09 million in FY March 2011, a 93.50% y-o-y growth.
AMF’s funding is deemed to be adequate. Equity accounted for 55.22% of total funding as at end-FY March 2011; as such the company lacks diversity in its funding portfolio while lack of a branch network limits its ability to tap deposits. AMF’s deposit base grew by 9.38% in FY March 2011, much slower than its RFC peers.
While AMF’s loan-to-deposit ratio clocked in at a high 176.29% as at end-FY March 2011, AMF’s loans were largely funded through equity and hence not a concern. Going forward, AMF intends to obtain funding through securitisation, thus diversifying its funding base.
Meanwhile, AMF’s liquidity is viewed to be adequate. Despite its statutory liquid asset ratio deteriorating to 16.23% as at end-FY March 2011 from 68.08% the previous year, the ratio is in line with the peers. Unlike most of the other RFCs, the company has matched assets against liabilities in all maturity buckets as the loans are largely funded via equity. Also, the majority of the loans are short-tenured, which supports better asset liability maturity mismatch.
The company’s capitalisation is deemed good; despite the loan growth, its risk weighted capital adequacy ratio stood at 49.92% as at end-FY March 2011, easing from 58.60% the previous year. Meanwhile, AMF’s internal rate of capital generation stood at a strong 32.53% as at end-FY March 2011.