Fitch downgrades Multi Finance to ‘B-’, Places on negative watch

Tuesday, 24 December 2013 00:39 -     - {{hitsCtrl.values.hits}}

Fitch Ratings Lanka has downgraded Sri Lanka-based Multi Finance PLC’s (MFP) National Long-Term Rating to ‘B-(lka)’ from ‘B+(lka)’, and placed it on Rating Watch Negative (RWN). KEY RATING DRIVERS The two-notch downgrade reflects a sharp deterioration in MFP’s solvency with unprovided NPLs (defined as more than three months past due) significantly exceeding equity. Fitch expects MFP’s liquidity to remain under pressure as its concentrated deposit base continues to contract. Fitch believes that MFP will likely remain loss-making in the current financial year due to narrowing margins, high operating costs and potentially increasing credit costs. Net losses posted by MFP widened to LKR74m for the six months to 30 September 2013 from LKR58m for FY13. The RWN reflects Fitch’s view that it would be challenging for MFP to improve its liquidity and financial profile. Fitch expects liquidity pressure to remain intense as cumulative maturity gaps under 12 months are high with limited confirmed unutilised credit lines at end-1HFY14. This analysis includes a loan from its parent Entrust Limited and extending its tenor could reduce the gap. MFP meets regulatory liquidity levels, but is heavily reliant on deposit rollover to fund its maturity mismatches. Deposits contracted 12% in 1HFY14 and the most recent November data does not indicate a reversal of this trend. MFP remains vulnerable to loan deterioration with unprovided NPLs (defined as more than three months past due) rising to 127% of equity at end-September 2013 from 66% at end-March 2013. Unprovided NPLs (more than six months past due) came to 35% of equity at end-September 2013 compared with 6% at end-March 2013. While there was a weakening in asset quality across the sector due to slowing economic growth, MFP’s situation was exacerbated due to loose underwriting standards. MFP’s ratio of NPLs (more than three months past due including interest in suspense) to gross loans as per the regulatory filings reached 29% at September 2013, from 22% at March 2013. MFP has put in place recovery procedures and tighter lending policies to improve its asset quality, which Fitch will continue to monitor. Reported capital ratios remain above the regulatory minimum, but MFP’s provisioning level remains low in relation to asset quality risks. RATING SENSITIVITIES The rating may be downgraded if MFP is unable to secure funding for its large maturity mismatches, and if it is unable to stem further weakening of its loan quality and profitability. Improvements in its liquidity profile, a halt in the deterioration of asset quality and return to profitability could lead to the rating watch being resolved and the rating affirmed at the current level. MFP is a licensed finance company that is 86% owned by Entrust Limited.