Fitch affirms Sinhaputhra Finance at ‘B’; Outlook Negative

Tuesday, 28 June 2011 00:00 - - {{hitsCtrl.values.hits}}

Fitch Ratings Lanka has affirmed Sinhaputhra Finance PLC’s (SFL) National Long-Term rating at ‘B(lka)’. The Outlook is Negative.

The affirmation reflects the latest improvement in SFL’s credit risk management practices and the subsequent stabilisation in its asset quality, although the latter still remains weaker than its peers’ average.

The rating may face downward pressure if SFL fails to prevent its asset quality and net non-performing loans (NPL)/equity from weakening under the regulatory six-month classification.

The high proportion of NPLs will also constrain the company’s overall net interest margins (NIM) and reduce its internal capital generation.

In addition, any deterioration in corporate governance performance at SFL would also lead to a negative rating action.

Fitch notes that SFL’s clientele are largely limited to the Kandy district (Central province) and its surrounding areas, and consist of the small and medium enterprise sector.

Vehicle finance via leases and hire purchase agreements accounted for half of SFL’s loan portfolio at end-March 2011 (FYE11), with the remainder consisting primarily of loans (majority backed by property mortgages) which has been the case over the last five years. Incremental portfolio loan growth was 11% in FYE11 following a contraction of 4% in FYE10.

Operationally, SFL’s operating costs/average assets (historical five-year average was 3.5% at FYE11) has been low relative to its sector. This is partly due to better utilisation of collection centres within its network. Statutory liquidity ratios were comfortable, while interest rate risks were managed by better matching of interest bearing assets and liabilities.

The company’s NIM continued to be well below the sector average at FYE11, largely because a large proportion of the lending portfolio was non-performing. SFL’s NPLs over three months as a percentage of loans spiked to 32% at FYE10 from 22% at FYE09. In early January 2011, its restructured recovery and credit procedures began to take effect with its three-month NPLs/loans declining to 27% at FYE11 (end-May 2011: 24%). SFL’s advances in arrears over six months (regulatory NPLs) followed a similar trend.

Established in 1978, SFL is a registered finance company. It was listed on the Colombo Stock Exchange on 2 June 2010.

However, its current managing director, Ravana Wijeyeratne, continues to maintain control, holding 52% of SFL’s equity.