RAM reaffirms People’s Merchant Finance Company’s ratings at BBB-/P3

RAM Ratings Lanka has reaffirmed People’s Merchant Finance Company Ltd’s (“PMFC” or “the Company”) long- and short-term financial institution ratings at BBB- and P3 respectively; the longterm rating carries a stable outlook.

The Company’s ratings reflect the financial flexibility derived from its ultimate, state-owned parent People’s Bank (“PB” or “the Bank”), which is the second largest commercial bank in Sri Lanka and is rated AAA/P1 by RAM Ratings Lanka. In addition, PMFC’s strong capitalisation provides cushioning against performance volatility. However, the ratings are constrained by its weak asset quality and small size.

PMFC is a small registered finance company (“RFC”) that falls within the regulatory purview of the Central Bank of Sri Lanka (“Central Bank”), and currently operates with just one branch in Kandy.

The Company had an asset base of LKR 310.15 million as at end-October 2010. Formerly known as Silvereen Finance Company Ltd, it assumed its current identity after People’s Merchant Bank Plc (“PMB”), a 39.20%-owned associate of People’s Bank, acquired a controlling stake of 99.99% in the past financial year. PMB is listed on the Colombo Stock Exchange; it is presently a specialised leasing company (“SLC”) with an asset base of LKR 3.46 billion which comes under the regulatory umbrella of the Central Bank.

PMFC was taken over by PMB with the intention of merging the two entities – the amalgamated entity would gain access to low-cost funds via customer deposits, while PMFC’s current operations could be extended to all of PMB’s branches. The merger plan is due to crystallise in the forthcoming financial year. Upon the merger of the two entities, PMFC would cease to exist while PMB would lose the status of “Bank” and would be transformed into an RFC. Due to the Company’s role in the transformation of PMB and the common identity that it shares with the PB Group, we expect support to be forthcoming from its ultimate shareholder should the need arise.

Meanwhile, the Company’s asset quality deteriorated during the year as delinquencies in loans increased. Its gross NPL ratio continued to increase to 26.14% as at end-October 2010 from 24.21% in FY Mar 2009, as absolute gross NPLs grew by LKR 16.02 million while its lending portfolio saw a decline of LKR 14.62 million. Nevertheless provisions were concurrently increased as the gross NPL coverage ratio increased to 27.41% in end-October 2010 from 9.22% in FY March 2009. Going forward, the company intends to focus on leases and hire purchase (“HP”), where repayments have been healthy. PMFC’s assets primarily consist of leases and HP, which together amounted to 61.41% of its total assets as at end-October 2010. Since the previous review, PMFC’s financial performance had improved mainly due to cost containment measures such as common management with its parent.

Furthermore, FY March 2010 results were weighed down by changes in accounting treatment with respect to the depreciation of property, plant and equipment. As such, the Company’s cost-to-income ratio plummeted to 38.47% in the first 7 months of FY March 2011 (FY March 2010: 75.24%). In line with the improved profitability, ROA and ROE also augmented to 5.94% and 8.17% respectively in end-October 2010, surpassing FY March 2009 levels of 3.08% and 5.37% respectively. RAM Ratings Lanka opines that these levels of profitability will be maintained until the merger in March 2011.

PMFC’s funding is dominated by shareholders’ funds, as the management lessened the emphasis on customer deposit growth in order to minimise interest payouts until the proposed amalgamation. Shareholders’ funds accounted for 70.25% in end-October 2010 while customer deposits accounted for just 21.82%, down from 26.53% in FY March 2009. The Company’s Asset Liability Maturity Mismatch (“ALMM”) also improved in most buckets as at end-October compared with FY March 2009.

PMFC continued to maintain high levels of capitalisation. The Company reported lofty Tier-1 and overall risk-weighted capital-adequacy ratios (“RWCARs”) of 77.13% each as at end-October 2010, well above the regulatory minimum of 5% and 10% respectively. The company’s high capitalisation cushions it from the high delinquencies it experienced.