RAM upgrades BRAC Lanka Finance’s ratings to BB+/Stable/NP
Tuesday, 18 February 2014 00:01
RAM Ratings Lanka has upgraded BRAC Lanka Finance PLC’s (BRLF or the company, previously known as Nanda Investments and Finance PLC (Nanda)) long-term financial institution ratings to BB+ from BB-. At the same time, the short-term rating has been reaffirmed at NP.
The Positive Rating Watch on the company has been lifted and the stable outlook on the long-term rating has been reinstated.
In July 2013, RAM Ratings Lanka placed BRLF’s long and short-term ratings on Rating Watch (with a positive outlook) premised on the positive contributions of the new shareholders’ following the change in ownership of the company.
The company has since taken steps to align its strategies with that of its ultimate parent BRAC Bangladesh (BRAC) through board representation and appointment of senior management. Therefore, given BRAC’s good financial position, its majority shareholding in BRLF through BRAC Lanka Investments Ltd. and the steps taken to realign BRLF’s strategies with that of BRAC, RAM Ratings opines support would be forthcoming in times of need.
Meanwhile, BRLF’s ratings are tempered by its below average asset quality while the ratings are upheld by parental support derived from its ultimate parent, BRAC and the Company’s strong capital adequacy.
Therefore, the ratings will be pressured in the event that BRAC’s shareholding falls below 51%.
BRAC is one of the largest development organisations in the world in terms of people served. While the organization is based in Bangladesh it has global presence in 11 countries including Sri Lanka where it operates as BRAC Lanka (Guarantee) Ltd. (BLG) and focuses on rural upliftment through the provision of micro-finance facilities.
In June 2013, BRAC acquired a majority stake of 56.60% in BRLF through BRAC Lanka Investment Ltd. Following the change in ownership, BRLF which previously engaged in hire purchase (HP) and leasing of second-hand luxury vehicles is expected to expand its portfolio into micro financing, in line with the core operations of BRAC.
BRLF’s asset quality is viewed to be below average owing to an influx of new non-performing loans (NPL) resulting in a worsening gross NPL ratio that compared weaker than peers’.
The company’s absolute gross NPLs surged twofold to Rs. 16.04 million in FYE 31 March 2013 (FY Mar 2013), increasing a further 35.92% to Rs. 21.79 million in 1H FY Mar 2014, reflective of the company’s target customer segment that is susceptible to business volatility. As such, BRLF’s gross NPL ratio deteriorated to 6.45% as at end-Sept 2013 from 4.86% as at FY Mar 2013 (FY Mar 2012: 2.69%).
Going forward, in line with the new management’s focus on expanding its portfolio in micro financing, BRLF’s risk profile is likely to change given that these facilities are uncollateralized and are extended to the low income stratum of society. However, RAM Ratings notes that the company intends on managing the higher risk by leveraging on the expertise of BLG and parent company BRAC.
BRLF’s performance is viewed as average reflective of the company’s net interest margin (NIM) remaining in line with peers on the back of lower funding costs coupled with the company’s low cost operating model.
In view of the company’s funding structure which was dominated by low cost shareholders’ funds, BRLF’s NIM remained comparable against peers at 20.47% in fiscal 2013 (fiscal 2012: 18.50%); however the NIM declined slightly to 18.93% in 1H FY Mar 2014, amid slower loan growth with excess funds being channeled toward lower yielding liquid assets.
Meanwhile, BRLF’s cost-to-income ratio of 64.60% in FY Mar 2013 (calculated excluding the revaluation gain) improved marginally from 68.37% a year earlier and compared in line with peers, reflective of it low-cost operating model.
Going forward, RAM Ratings expects BRLF’s core performance to improve given the management’s intentions to expand into the higher yielding micro finance segment, while overall performance is likely to be weighed down by a potential increase in overhead costs given geographical expansion.
BRLF’s funding base continues to be dominated by shareholders’ funds, which fulfilled 83.33% of its funding needs as at end-FY Mar 2013. Despite an 80.97% y-o-y increase in its deposit base in FY Mar 2013 RAM Ratings notes that BRLF’s deposit garnering ability remains weaker than peers hampered by its weak franchise and dependence on a single branch for accepting deposits. That said, given BRLF’s access to borrowings at concessionary rates (around 8%-9%) from BRAC, its funding composition is expected to tilt toward borrowings in the medium to long term.
Elsewhere, BRLF’s liquidity position is viewed to be strong; its statutory liquid asset ratio improved to 49.56% as at end-FY Mar 2013 (FY Mar 2012: 35.70%) however declining slightly to 35.33% as at end-Sept 2013. The ratio compared well above that of similarly-rated peers’.
BRLF’s capital adequacy is deemed strong. Its tier-1 and overall RWCARs clocked in at 40.92% as at end-FY Mar 2013 (end-FY Mar 2012: 40.88%) increasing to 43.18% as at end- Sept 2013 amid slower loan growth; the ratios are well above those of similar-rated peers. Elsewhere, BRLF’s core capital levels of Rs. 273.24 million which stood below the regulatory minimum core capital requirement as at end-Sept 2013, has been addressed through a rights issue in January 2014.