RAM assigns ratings of BBB-/P3 to Softlogic Finance

RAM Ratings Lanka has assigned the respective long- and short-term financial institution ratings of BBB- and P3 to Softlogic Finance PLC (SLF); the outlook on the long-term rating is stable. The ratings are supported by its adequate asset quality, performance, capitalisation and liquidity while being tempered by moderate funding and aggressive loan growth.

Formerly known as Capital Reach Leasing Ltd, SLF is a registered finance company (RFC) and comes under the purview of the Central Bank of Sri Lanka (CBSL). In August 2010, Softlogic Holdings PLC (SLH) acquired 53.84 per cent of Softlogic Capital PLC (SLC) formerly known as Capital Reach Holdings Ltd (CRHL); SLC in turn has a direct stake of 62.17 per cent in SLF.

Since then, SLH has provided financial support in terms of capital infusions. Furthermore, SLF leverages on the Group’s well-known franchise to garner deposits; this is reflected in the aggressive growth in deposits and better renewal rates. Meanwhile, SLF has been able to increase its market share (in terms of assets) in the RFC industry to 1.88 per cent as at end-March 2011 from 1.01 per cent in the previous year.

We opine SLF’s asset quality to be adequate.

While the loan growth is aggressive at 168.74 per cent (annualised) and there has been an influx of absolute non-performing loans (NPL) during the 5M FYE 31 March 2012 (5M FY March 2012), SLF’s gross NPL ratio stood at 0.98 per cent as at end-August 2011 and was the best among the similar rated peers.

Despite the majority of its loan portfolio being unseasoned and the high possibility of NPLs rising as a result of its aggressive loan expansion, the company has ample buffer to bear further NPLs compared to peers at the BBB rating category. The company’s loan base mainly consists of hire purchase (HP) and leases of commercial vehicles. With regards to sectoral exposure, it is most exposed to the services and trading sectors.

SLF’s performance is viewed to be adequate. In line with the improving interest income and loan growth, net interest margins (NIM) improved from 9.11 per cent FY March 2010 to 9.96 per cent in FY March 2011, better than most of similar-rated peers.

The NIM ameliorated owing to faster repricing of deposits relative to its long-term, fixed-rate loan portfolio amid the receding interest rates and the high proportion of securitisation loans and equity in its funding structure. SLF’s cost-to-income ratio is weaker compared to peers but it has improved to 74.69 per cent in FY March 2011 (FY March 2010: 80.87 per cent) on the back of an expanded top line which led to higher profitability.

That said, we observed a jump in absolute overheads in fiscal 2011 by Rs. 131.65 million (or 53.11 per cent) as SLF has opened five new branches during last year. As the company intends to open eight more branches during fiscal 2012, we expect its cost-to-income ratio to remain higher than its peers. Along with the improved top line and NIM, SLF’s pre-tax profits surged to Rs. 84.79 million in FY March 2011 from Rs. 26.16 million in FY March 2010.

Meanwhile, the company’s return on assets (ROA) too improved to 2.69 per cent in FY March 2011 from 1.72 per cent in the previous year.

SLF’s funding is deemed to be moderate; the company depends mainly on borrowings (mainly securitisation), which makes up 48.69 per cent of total funding as at end-FY March 2011.  As such, SLF’s loan-to-deposit ratio (LD) stood at a high 238 per cent as at end-FY March 2011. On a separate note, SLF’s liquidity is viewed to be adequate.

Its statutory liquid asset ratio stood at 17.13 per cent as at end-FY March 2011, reducing from 21.04 per cent during last fiscal year owing to rapid loan growth. Nonetheless, as at end-August 2011, the statutory liquid asset ratio improved to 21.19 per cent owing to the rights issue.  While SLF’s liquidity ratio has surpassed the peers at present, the ratio is expected to ease given its aggressive loan growth. Meanwhile, the use of long-term securitised borrowings has improved asset liability maturity matching (ALMM).

RAM Ratings Lanka opines SLF’s capitalisation to be adequate. The risk weighted capital adequacy ratio (RWCAR) improved to 13.41 per cent as at end-FY March 2011 from 12.88 per cent in the previous year owing to the capital infusion by the Group amounting to Rs. 267.53 million and better internal capital generation.

Moreover, the ratio further improved to 15.87 per cent in 5M FY March 2012 owing to another capital infusion by the Group amounting to Rs. 535 million. Nonetheless, we expect this to moderate with the planned loan growth.