ICRA Lanka reaffirms Orient Finance Issuer Rating at ‘BBB-’, revises outlook to Negative
Wednesday, 8 January 2014 00:00
ICRA Lanka has revised the outlook on the long term rating of Orient Finance PLC (OFP) from Stable to Negative while reaffirming the Issuer Rating at [SL] BBB- (pronounced SL triple B minus).
The revision in the outlook reflects OFP’s deteriorating asset quality due to considerable rise in NPAs, which combined with the significant increase in the cost of funds, have resulted in the decline in profitability levels. Given the persistent pressure in the operating environment, ICRA expects the Asset Quality of the NBFI sector would remain weak in the immediate future; thereby pressure on OFP’s asset quality, earnings and capitalisation is likely to persist.
The rating continues to derive strength from the financial, operational and management support OFP is expected to receive from the Janashakthi group. The rating also factors in the experienced and professional management team coupled with the improvements in risk management systems.
ICRA has taken note of the reduction in earnings as a result of falling margins. Despite an increase, gearing remains moderate at 3.9x in September 2013. OFP’s liquidity position remains comfortable aided by relatively medium-to-long term public deposits, which OFP has been mobilising in the past year. The Key Rating Sensitivities for OFP going forward would be arresting asset quality deterioration at the earliest and improvement in profitability levels, through higher lending margins.
OFP’s core lending operations continue to be focused on auto financing (83% of total portfolio), however during FY2013 OFP added pawning to its product offering. As of end 13 September pawning accounts for less than 1% of OFP’s total portfolio. OFP plans to discontinue its equipment financing business due to high portfolio losses incurred in this business segment, OFP’s equipment finance portfolio accounted for approximately 2% of its total portfolio as of end 13 September, whilst its Factoring business accounted for the remaining 14% of OFP’s total portfolio.
The company is likely to focus mainly on auto financing and factoring going ahead. OFP’s auto financing business comprises mainly of car financing (36% of total Portfolio as of 13 September) and two-wheeler and three-wheeler financing (30%) while Heavy Commercial Vehicles accounted for 18%.
OFP’s business continues to carry interest rate risk, as 100% of OFP’s lending is on fixed rates, though its factoring portfolio carries re-pricing flexibility due to the short term nature of the business, while bank funding (56% of total borrowings) carry variable interest rates. ICRA notes that OFP would need to tie-up longer term borrowings to address these gaps. ICRA also notes that OFP’s factoring portfolio continues to carry high concentration risk with the top 10 customers accounting for more than 38% of the total factoring portfolio (28.5% of Net worth as of end 13 March).
Asset quality deterioration has been the key credit challenge for OFP with Gross NPA Ratios increasing from 4.48% as of 13 March (12 Mar: 4.57%) to 6.61% as of 13 September. This is marginally lower than the NBFI Industry, which also registered a decline from 5 % (12 December) to 6.1% (13 October).
Thus the decline of OFP has been considerable compared to the NBFI industry and peers. OFP’s NPAs are predominantly from the SME sector stemming from the slowdown in the economy directly affecting business in these segments. OFP’s net NPA ratio also declined from 1.58% as of 13 March (12 March: 1.23%) to 2.55% as of end 13 September.
OFP has maintained a provision of 61% for its NPAs as of 13 September down from 65% maintained as of end 13 March. Incremental asset quality is likely to be guided by the evolving economic scenario. The forecasted improvement in economic growth in CY2014 could aid in improvement in the asset quality for NBFIs.
OFP started mobilising deposits during H2 FY13 subsequent to receiving its LFC license. OFP has raised Rs. 666 million of Fixed Deposits as of end 13 September which accounts for 20% of OFP’s total funding profile.
ICRA notes that over 50% of OFP’s fixed deposits carry tenure over 1-year, which gives OFP comfort for its liquidity position. However OFP’s cumulative short term mismatches in the less than 1-year bracket have widened to 19% of total assets compared to 16% recorded as of 12 September, however OFP’s Liquidity position compares well with the NBFI Industry.
Profitability levels have declined considerably during H1 FY2014 due to high provisioning costs resulting from declining asset quality and falling NIMs due to high cost of funds. OFP’s cost of funds increased 39% for FY13 resulting in NIM falling from 14.60% recorded as of 12 March to 12.70% as of 13 March (13 September: 12.39%).
Operating expense levels recorded improvement during FY13 due to comparatively higher growth in assets, however provisioning costs has increased significantly from 0.99% recorded as of 13 March (12 March: -0.05%) to 3.14% as of 13 September, causing ROAA to fall to 1.97% as of 13 September compared to 5.39% as of 13 March (12 March: 6.40%).
RONW declined to single digits as of 13 September to 9.59% compared to 23.27% recorded as of 13 March (12 March: 28.93%).
OFP’s capitalisation levels have declined during FY13 with the growth in portfolio and the declining internal capital generation due to falling profitability. Although OFP’s Regulatory Capital Adequacy Ratio declined to 19.42% as of 13 September compared to 22.21% as of 13 March (12 March: 35.62%); it remains comfortably above the minimum regulatory requirements. ICRA expects committed support from the promoter in terms of capital infusions to facilitate growth and maintain gearing at moderate levels.
OFP was initially setup as Orient Financial Services Corporation Limited by Readywear Industries Group as a Specialised Leasing Company in 2003to finance Mitsubishi vehicles sold by its Auto dealership arm-United Motors Lanka PLC (UML). In 11 February, the Janashakthi Group acquired ownership of OFP through its subsidiary, Orient Capital Ltd., as part of the group’s strategy to venture into a fully-fledged financial service outfit through OFP and other subsidiaries. The company acquired its present name following the takeover and listing of the company’s shares on the Dirisavi Board (secondary board) of the CSE on 12 June.
OFP also converted itself into a Licensed Finance Company (LFC) in June 2012, enabling it to mobilise deposits from the public. Leasing and hire purchase of brand new/used motor vehicles, factoring and recently pawning are the main activities of the company. OFP had a total portfolio of Rs. 4,101.57 million on 30 September, 2013 which comprised Lease and HP (85%), Factoring (14%), and Pawning (1%).
For H1 FY 2014 OFP reported a Net profit of Rs. 38.8 million on a total asset base of Rs. 4,239.1 million. During the year ended March 2013, the company reported a net profit of Rs. 168.9 million on a total asset base of Rs. 3,650.10 million, compared to a net profit of Rs. 136.5 million on an asset base of Rs. 2,613.8 million, in the previous financial year.