LRA reaffirms Prime Grameen Micro Finance’s ratings at B/NP
Thursday, 16 October 2014 00:31
Lanka Rating Agency has reaffirmed Prime Grameen Micro Finance Ltd.’s respective long- and short-term financial institution ratings at B and NP. Concurrently, the ratings have been placed on Rating Watch Positive.
Meanwhile, the ratings are weighed down by its weak capitalisation levels subsequent to provisions made for its legacy Non-Performing Loans (NPLs). Nevertheless, the ratings are upheld by its average asset quality and improving profitability supported by the performance of its new microfinance portfolio.
The Positive Rating Watch is premised on the announcement made by Hatton National Bank Plc on the strategic acquisition of a controlling stake of 51% in Prime Grameen. HNB is the second largest privately-owned commercial bank in Sri Lanka, accounting for around 9% of assets in the banking sector as at the end of March 2013.
The proposed acquisition is in line with the financial sector consolidation plans outlined by the Central Bank of Sri Lanka. HNB Plc has already made an announcement with the Colombo Stock Exchange in this regard.
LRA opines the change in ownership will significantly enhance the credit profile of Prime Grameen.
Established as a micro-financing institution in 2000, Prime Grameen obtained Licensed Finance Company status in 2010. In June 2011, it was brought under the ownership of real estate company Prime Lands Ltd. Following the restructuring of Prime Grameen’s balance sheet, its new management resumed lending and expanded the company’s micro-financing portfolio by capitalising on its strong presence in rural areas.
Prime Grameen is also pursuing recoveries on legacy NPLs which had been disbursed under the previous management. Elsewhere, the company remained a small player in the LFC segment, accounting for around 0.85% of the LFC industry’s assets as at the end of March 2014.
Prime Grameen’s asset quality is deemed average, supported by its good collections in new micro finance loans stemming from the group’s lending system and its proximity to clients. It showed a high gross NPL ratio of 16.12% as at the end of June 2014 (end-March 2013: 22.72%) reflective of Prime Grameen’s legacy NPLs, its exposure to the relatively risky micro-finance customer base as well as its concerns on the seasoning of its credit assets following expansion.
That said, Prime Grameen has shown a good NPL coverage level of 100% as at the end of June 2014 as well as performance well through its new microfinance loans evident by an adjusted gross NPL ratio (without legacy NPLs) of 0.50% as at the end of June 2014.
Meanwhile, the company’s asset base expanded 35.57% y-o-y to Rs. 5.83 billion as at the end of FY March 2014, largely driven by credit asset growth stemming from microfinance.
Microfinancing facilities made up the bulk of Prime Grameen’s lending, with around 92.91% of its credit assets as at end-1Q FY Mar 2015. The company’s performance is improving, supported by its rising performance indicators reflective of the growth in the high-yielding microfinance portfolio.
Looking ahead, the overall performance of Prime Grameen will largely depend on the ability of the company to sustain the quality of its new loans. Meanwhile, net interest income increased 75.97% year-on-year in fiscal 2014, reflective of the expansion of its new loans in the high-yielding microfinance segment.
Subsequently, Prime Grameen’s NIM improved to 32.85% in fiscal 2014 from 24.65% in fiscal 2013 comparing better to that of its industry peers, supported by the high yields from its new microfinance loans as well as the reduction of its funding costs in line with the reduction of interest rates in customer deposits following CBSL policy rate cuts.
Elsewhere, Prime Grameen’s pre-tax profit almost doubled in fiscal 2014 to Rs. 476.75 million (fiscal 2013: Rs. 240.96 million). Consequently, the company’s return on assets improved to 9.42% in fiscal 2014 from 6.38% in fiscal 2013, comparing better to that of its industry peers.
Meanwhile, in compliance with the statutory liquid asset requirement, Prime Grameen improved its liquid asset ratio to a healthy 21.85% as at the end of June 2014 from a weak 5.55% as at the end of March 2013, reflective of its management’s concerted efforts to improve its liquidity position to comply with CBSL directions.
Lanka Rating Agency opines that Prime Grameen’s capitalisation levels are weak. Its tier-1 and overall risk-weighted capital-adequacy ratios (RWCARs) clocked in at 1.50% and 3.00% as at end-FY March 2014, below the regulatory minimum requirement stipulated by the CBSL. As a result of the retrospective adjustment to the financial accounts, a sum of Rs. 495.28 million impairment provision was made in FY March 2012 accounts for the legacy NPLs, restating the core capital of Prime Grameen to Rs. 70.60 million as at the end-FY March 2013 (Prior to restatement end-FY Mar 2013: LKR 401.71 million).
Previously, CBSL on a request made by the company, had granted time till FY March 2015 to provide for the legacy NPLs gradually. However, a management decision was taken to make the full provision required for the legacy NPLs. Looking ahead, the management has proposed a capital reduction plan to CBSL which will wipe out the carried forward losses (the carried forward loss includes a gain of Rs. 329.96 million from revaluation of investment property) of Prime Grameen against the stated share capital. The proposed action plan is expected to enhance the company’s core capital to levels acceptable to CBSL.