RAM assigns BBB- to Softlogic Finance’s Rs. 500 m Redeemable Senior Debenture (2012/2017)

RAM Ratings Lanka has reaffirmed Softlogic Finance PLC’s respective long- and short-term financial institution ratings at BBBand P3. Concurrently, RAM Ratings Lanka has assigned a long-term issue rating of BBB- to the company’s Rs. 500 million Redeemable Senior Debentures (2012/2017).

Both long-term ratings have a stable outlook. The ratings are supported by SLF’s adequate asset quality, financial performance, capitalisation and liquidity, but tempered by its moderate funding profile and lack of a seasoned loan portfolio.

Notably, the company has managed to expand its market share in the last few years; as at end-September 2011, SLF’s market share had been enlarged to 3.15% (end-March 2011: 1.88%). Notably, this was supported by the company’s increasing geographical presence and the improving macroeconomic landscape.

SLF’s asset quality is deemed adequate; although its gross non-performing-loan ratio of 0.94% as at end-December 2011 was better than its peers’ (end- March 2011: 1.08%), RAM Ratings’ concerns hinge on the company’s aggressive loan growth.

The lower NPL ratio was driven by its aggressive 139.65% (annualised) loan growth (equivalent to Rs. 3.98 billion) in the first nine months of FYE 31 March 2012 while absolute NPLs surged 66.59% (or Rs. 43.91 million) to Rs. 73.15 million as at end-December 2011. Given that a significant proportion of SLF’s loan book is relatively unseasoned, its NPL levels could worsen as these loans season.

Meanwhile, the company’s performance is deemed adequate. Its net interest margin improved from 9.11% in FY Mar 2010 to 9.96% in FY Mar 2011, before widening further to 10.19% in 9M FY Mar 2012 – surpassing those of most of its similarly rated peers. The broader NIM was supported by faster repricing of deposits amid receding interest rates and a higher proportion of securitisation loans and equity in the company’s funding structure. Looking ahead, RAM Ratings envisages its NIM to ease along with rising interest rates.

Conversely, SLF’s cost-to-income ratio is weaker than its peers’, albeit improving over its historical levels due to its stronger top line. That said, the ratio had weakened slightly to 76.70% as at end-December 2011 (end-March 2011: 74.69%), as absolute overheads had increased to Rs. 431.73 million (or annualised 124.27%) following the opening of five new branches.

As the company intends to set up more branches in 2012, RAM Ratings expects its cost-to-income ratio to remain higher than its peers’ until the new braches breakeven. Supported by its better core performance, SLF’s pre-tax profit surged to Rs. 121.62 million in 9M FY Mar 2012 (FY Mar 2011: Rs. 84.79 million).

Elsewhere, the company’s funding position is deemed moderate; deposits and borrowings (mainly securitisation) accounted for a respective 44.19% and 43.25% of its funding mix as at end-December 2011 while its loans-to-deposits ratio remained high at 202.60% (end-March 2011: 238.80%) reflecting the aggressive loan growth.

On the other hand, deposits surged 189.37% (annualised) to Rs. 3.78 billion as at the same date (end-March 2011: Rs. 1.57 billion), backed by its enlarged branch network and promotional campaigns.

On a separate note, SLF’s liquidity is also viewed to be adequate. Its statutory liquid asset ratio stood at 14.56% as at end-December 2011 (end-March 2011: 17.13%) amid its rapid loan growth; the ratio is presently in line with those of its peers’.

SLF’s capitalisation is deemed adequate. Its overall risk-weighted capital adequacy ratio of 13.07% was largely unchanged and in line with its peers’ as at end-December 2011 (end-March 2011: 13.41%). Despite a Rs. 535 million capital infusion by Softlogic Holdings in August 2011, the company’s RWCAR stayed relatively unchanged as a result of its rapid credit expansion.