RAM reaffirms Alliance Finance Company PLC’s ratings and issue ratings
Monday, 27 January 2014 00:00
RAM Ratings Lanka has reaffirmed Alliance Finance Company PLC’s long and short term ratings of BBB and P2. The outlook on the long-term rating remains positive.
The positive outlook is premised on the improving company asset quality factors despite the rapid loan growth. The financial institution and issue ratings are upheld by AFC’s above-average asset quality, performance and liquidity level while being tempered by unseasoned loan portfolio, given rapid loan growth.
Meanwhile, we have assigned and reaffirmed the following issue ratings accordingly:
Six Trust Certificates – Rs. 7.60 million Secured Unsubordinated Trust Certificates (2013/2015); Current rating: BBB/Positive; Rating action: Assigned
Rs. 1.00 billion Unsecured Subordinated Redeemable Debentures (2012/2017); Current Rating: BBB-/Positive; Rating Action: Reaffirmed
Rs. 1.50 billion Unsecured Subordinated Redeemable Debentures (2013/2018); Current Rating: BBB-/Positive; Rating Action: Reaffirmed
We deem the company’s asset quality to be above-average. AFC has continued to focus on three-wheeler financing that has a relatively low delinquency rate, while increasing its exposure to gold loans that are fully-backed by easily liquefiable gold. As such, supported by the latter and good underwriting and recovery measures, the company’s absolute NPLs increased slightly in FYE 31 March 2013 (“FY Mar 2013”) and the first six months of FY Mar 2014 (“6M FY Mar 2014”), despite the rapid expansion of its loan book.
AFC’s gross NPL ratio improved to 1.94% as at end-FY Mar 2013 from 2.00% the previous year and is better than that of similarly-rated peers. While the ratio weakened marginally to 2.15% as at end-September 2013, we note that the company’s asset quality indicators, compared better than its similar rated peers and the LFC industry which charted a deterioration in 1H FY March 2013.
AFC’s financial performance is opined to be above average supported by increased exposure to relatively more lucrative segments such as three-wheeler financing and gold loans. That said, we note that AFC’s its financial indicators declined in FY Mar 2013 and 1H FY Mar 2014, in view of rising interest expenses and credit costs coupled with slower loan growth.
AFC’s exposure to high yielding segments resulted in a NIM of 10.07% in FY Mar 2013, better than similarly-rated peers’. The company’s historically high cost-to-income ratio had improved as a result of strong top line growth and is now in line with that of peers. AFC recorded a pre-tax profit of Rs. 586.17 million in FY Mar 2013, compared to Rs. 492.72 million the previous year. Looking ahead, its performance is expected to remain at the same level given the slow growth and plans to venture into the micro finance segment.
AFC’s funding composition remained relatively unchanged with deposits accounting for the greater proportion of the funding base. AFC’s deposit base expanded 33.70% y-o-y in FY Mar 2013 supported by the aggressive advertising campaigns and the greater geographical reach. That said, we note that the company has increased dependence on borrowings to fund loan growth through the issuance of debentures.
Given the increased exposure to borrowings, AFC’s LD ratio remained high at 158.84% as at end-FY March 2013 (end-FY Mar 2012: 152.73%) and remained relatively unchanged at 147.76% as at end-September 2013. Elsewhere, AFC’s liquidity is viewed to be adequate.
Its statutory liquid asset ratio improved to 19.39% as at end-September 2013 from 12.42% as at end-FY Mar 2013 (FY Mar 2012: 12.40%) given slower loan growth; the ratio compared in line with similarly-rated peers.
AFC’s capitalisation levels are viewed to be above average. AFC’s overall RWCAR improved to 17.79% as at end-FY Mar 2013 (end-FY Mar 2012: 11.05%) following the issuance of subordinated debentures. Meanwhile, its tier-1 RWCAR clocked in at 10.71% as at end-FY Mar 2013 (end-FY Mar 2012: 9.14%). AFC’s tier 1 and overall RWCAR remained relatively unchanged at 10.52% and 17.53% as at end-September 2013 given slower loan growth; the ratios compared better than similar rated peers.
AFC’s ratings may be upgraded should the company maintain its asset quality and performance indicators at levels commensurate with a BBB+ rating. Conversely, a stable rating outlook may be reinstated and the ratings reaffirmed should its asset quality significantly deteriorate as a result of the expansion of its loan book.