RAM Ratings Lanka has upgraded LB Finance PLC’s long-term and short-term financial institution ratings to BBB+ and P2, from BBB and P3 respectively; the long term rating has a stable outlook.
The rating upgrade reflects LBF’s track record of improving asset quality despite rapid expansion of its loan base. The upgrade is also premised on the Company’s healthier financial performance-reflected by its wider margins and improved profitability indicators.
In tandem, RAM Ratings Lanka has also upgraded the long- and short-term ratings of LBF’s Rs. 450 million unsecured subordinated redeemable debentures from BBB-/P3 to BBB/P3 respectively.
The difference of a notch between the rating of LBF’s subordinated bonds of Rs. 450 million and its long-term financial institution rating reflects the subordinated nature of the former to the Company’s senior unsecured obligations.
LBF is the third-largest registered finance company in Sri Lanka, accounting for 10.47% of the industry’s assets as at end-September 2010. The Company’s gross loan portfolio continued to expand robustly, growing by 24.65% year on year during FYE 31 March 2010 compared with 30.94% a year ago; the loan base augmented further by 48.14% y-o-y during the first half of FY Mar 2011.
The growth was mainly derived from the pawn-broking, key lease and hire purchase portfolios which were supported by the Company expanding its network to 27 branches and 75 pawning centres. Despite its aggressive growth, the Company has over the years demonstrated a track record of improving asset quality.
For instance, LBF’s gross Non Performing Loans ratio had improved to 3.92% as at end-FY Mar 2010 (FY Mar 2006:14.82%) and further bettered to 3.21% as at end-September 2010 among the best in the industry. Thus despite the expansionary strategies pursued by the Company, we note that the accretion of absolute NPLs had been at a slower rate. This has been driven by LBF’s efficient monitoring and recovery procedures.
In line with the rapid expansion of the loan portfolio, the Company’s financial performance continued to improve; profit-after-tax augmented 39.09% y-o-y to Rs. 500.16 million during the reviewed period. The Company outperformed the industry with a net interest margin of 13.03% as at end-September 2010 in comparison with the industry ratio of 7.95% as at the same date; this was mainly due to the Company’s high yielding portfolio. LBF’s return on assets and return on equity rose to 7.52% (end-FY Mar 2009: 4.49%) and 69.52% (end-FY Mar 2009: 47.77%) as at end-September 2010 and were better than those of its peers. Concurrent to the improving performance, LBF had been able to maintain its Tier-1 and overall risk weighted capital adequacy ratios at 10.59% and 12.39% respectively as at end-September 2010, within the regulatory requirement. Further, in tandem with the Company’s better asset quality, its ratio on net NPL to shareholders’ funds ameliorated to 4.81% as at end- September 2010 (end-FY Mar 2009: 14.41%).
Meanwhile, RAM Ratings Lanka opines that LBF’s funding structure is sound. Public deposits grew to Rs. 14.55 billion as at end-September 2010 (end-FY Mar 2009: Rs. 9.56 billion), amounting to 68.74% of total funding.
Further, it notes an improvement in the asset liability maturity mismatch, especially in the “less than three months in arrears” bucket, owing to an increase in short-tenured pawning advances coupled with deposit tenures gradually tilting towards the medium to long term; this was due to the drop in short-term interest rates.
RAM Ratings also derives comfort from LBF’s unutilised funding lines of Rs. 700 million.