ICRA Lanka reaffirms the Issuer Rating of Alliance Finance Company PLC
|Instrument||Rated Amount (LKR Mn)||Rating Action|
|Issuer Rating||N/A||[SL]BBB- (Negative); Reaffirmed|
ICRA Lanka Limited has reaffirmed the Issuer Rating of Alliance Finance Company PLC (AFC or the Company) at [SL]BBB- (Pronounced SL triple B minus) with Negative outlook.
The rating reaffirmation factors in AFC’s established track record, fairly diversified lending and borrowing profiles as well as its adequate capital and liquidity profiles. During the period under review, ICRA Lanka notes that AFC was able to achieve a marginal portfolio growths in FY2020 (6%) and 6MFY2021 (8%, annualized) as compared to FY2019 (1%) as the Company tightened lending norms and shifted focus towards asset backed lending (98% of the portfolio was secured as of Sep-20).
The continued negative outlook factors in the sustained weak asset quality due to non-conducive macro environment and moderation in profitability. Correspondingly, the gross NPA of the company stood at 9.59% as of Sep-20 and at 11.10% as of Mar-20. 90+ days past due (dpd) also increased to 29.94% in Sep-20 as compared to 25.72% in Mar-20 (17.17% in Mar-19). ICRA Lanka notes that the NPA increase of AFC is on par with the asset quality trend in the NBFI sector. The rating also takes cognizance of the initiatives taken by the company to improve its loan appraisal, collection and monitoring processes with the technical assistance programme of International Finance Corporation (IFC) and the impact of the above on asset quality is seen in Sep-20. However, the earnings profile was impacted by the increasing credit cost; RoA declined to 0.63% in FY2020 from 0.96% in FY2019 (2.36% in FY2018) and improved to 0.99% in 6MFY2021.
The Negative outlook reflects the modest asset quality and earnings profile in view of the build-up in the softer bucket delinquencies. The outlook may be revised to ‘Stable’ in case of steady improvement in AFC’s delinquencies and profitability over the medium term. The rating may be downgraded in case of further deterioration in asset quality by way of forward movement of delinquencies into harder buckets and in case of weakening in solvency, liquidity or earnings profile.
Key rating drivers
Established track record; experienced Board and senior management team: AFC is one of the oldest finance companies in Sri Lanka with an established track record of more than 60 years. Largest shareholder is Mr. R.K.E.P De Silva who holds close to 32.75% stake as in Sep-20. AFC operates in 88 locations staffed with 1,200 employees as in Sep-20. The company’s board comprises of eight directors including four non-executive directors. The board includes a mix of experienced and professionally qualified executive directors overlooking operations, finance, marketing and sustainability aspects. The executive directors provide direction to the management which comprises of experienced and qualified team. The company underwent a restructuring programme under IFC and has largely improved its credit origination, credit appraisal, portfolio management, collections and recoveries. ICRA Lanka also notes that the business continuation plan that was initiated under the IFC program has benefited the company during COVID-19 outbreak.
Fairly diversified portfolio, focus on asset backed lending: The company’s key products are leasing, which accounts for 76% of the total portfolio as of Sep-20, followed by loans (15%), gold loans (8%) and micro finance (1%). In terms of asset classes, 3-wheeler (34%), car financing (20%), lorry (12%), and van financing (7%) were the key constituents of AFC’s portfolio in Sep-20. The portfolio is shifting towards vehicle financing, closer to 82% of the portfolio is backed by vehicles as of Sep-20 as compared to 80% in Mar-20 and 75% in Mar-19. ICRA Lanka notes that the portfolio growth is expected to remain at about 6% over the near to medium term with focus on 3-wheeler, 2-wheeler and gold loan segments.
Comfortable capitalisation profile; AFC reported core capital ratio of 9.84% as in Sep-20 as compared to 9.76% as in Mar-20, the same was 9.86% in Mar-19. The total capital ratio moderated to 12.70% as in Sep-20 as compared to 13.18% as in Mar-20 (11.93% in Mar-19) with the recognition of revaluation reserves of LKR 506 Mn under Tier II capital and adjustment for investments in other banking and financial institutions. Presently, the company is maintaining a healthy margin above the core and CAR ratios as compared to the regulatory requirements of 6.50% and 10.50%. AFC’s core capital stood at about LKR 3,465 Mn as in Sep-20 as compared to the regulatory minimum capital requirement of LKR 2,289 Mn (LKR 2,500 Mn by December 2021). The company’s present core capital meets the future regulatory requirement till Jan-22. The company may need to raise external capital to meet risk weighted capital adequacy levels, in view of the envisaged growth plans if the anticipated growth in profitability does not materialize.
Diversified funding base and healthy liquidity profile: AFC has a fairly diversified funding profile comprising of retail fixed deposits, debentures and term loans from banks. As of Sep-20, around 45% of the company’s funding was from deposits, while the balance was through foreign funding agencies, bank loans and debentures. Going forward, the company’s funding composition would be maintained at 50:50 share between deposits and other borrowings. The rating also notes that the established track-record and good governance structure of the company has helped AFC to secure long term funding with some of the leading DFIs. Access to diversified funding lines of LKR 14,374 Mn and good deposit renewal rate of 87% in Sep-20 provides comfort from a liquidity perspective. The short term (less than 1 year) cumulative Asset-Liability mismatch has increased to 17.73% as in Sep-20 as compared to 0.02% in Sep-19 due to relying on short term borrowings. As compared to peers, the company maintains a healthy liquidity profile. Going forward, the company’s ability to maintain a balanced funding structure and a healthy liquidity profile will be crucial.
Moderate profitability: AFC’s yield on advances improved to 27.03% in FY2020 as compared to 26.07% in FY2019. Cost of funds moderated to 12.34% in FY2020 as compared to 12.48% in FY2019 with the diversification of funding. As a result, NIMs improved to 11.78% in FY2020 from 11.23% in FY2019. The operating cost/average total assets (ATA) increased to 7.67% in FY2020 from 7.37% in FY2019 as a result of increased taxes imposed on financial sector. ICRA Lanka noted that the credit cost/ ATA increased to 3.37% in FY2020 as compared to 2.55% in FY2019 and same has moderated to 2.83% during H1FY2021. AFC’s profitability (return on average assets) reduced to 0.63% in FY2020 as compared to 0.96% in FY2019 and improved to 0.99% in H1FY2021. Profitability of the company moderated largely because of the increased credit costs. Ability of the company to improve its profitability going forward would be crucial.
Deterioration in asset quality due to challenging macro environment: The company’s gross NPA ratio increased to 11.10% as of Mar-20 from 7.97% in Mar-19, and it moderated to 9.59% in Sep-20. Gross NPA of the company was on par with the NBFI sector of 11.37% as of Mar-20. The increase in GNPA is largely attributable to the unfavorable macro-economic environment which prevailed during the period under review. However, the GNPA in Sep-20 across the industry was affected by the standstill in asset quality due to debt moratorium granted as a result of COVID-19 pandemic. The phasing out portfolio which includes micro finance loans, business loans, equipment finance etc. accounted for 58% of the NPA portfolio as of Sep-20. The net NPA stood at 2.11% as in Sep-20 as compared to 4.19% in Mar-20 (3.10% in Mar-19). AFC’s Net NPA ratio stood lower than that of the NBFI sector of 5.10% as in Sep-20. On the other hand, the provision coverage ratio of the company stood high at 78% as in Sep-20 as compared to 62% in Mar-20 and 61% in Mar-19. Portfolio delinquencies in the softer buckets (90+ dpd) have been under stress while the delinquencies in 180+dpd improved as a result of the strong recovery actions. ICRA Lanka notes that the ability of the company to control the slippages of discontinued portfolio and its ability to control the delinquencies of the softer buckets will be key monitorables.
Analytical approach: For arriving at the ratings, ICRA Lanka has applied its rating methodologies as indicated below.
Links to applicable criteria: ICRA Lanka’s Credit Rating Methodology for Non-Banking Financial Institutions
About the Company:
Alliance Finance Company PLC is one of the oldest finance companies in Sri Lanka with a history of over 60 years. The key shareholders of the Company include Mr. R.K.E.P De Silva (32.75%), Motor Service station (Pvt) Ltd (13.48%), Ms. D.M.E.P Perera (7.42%) and Mr.D.F.W.S.K. Perera & Mr.D.F.W. Perera (4.10%). The Company extends leasing, hire purchase, micro finance, gold loans and other loans. The Company has close to 106,000 customers through a network of 88 customer locations and has over 1,200 employees. Alliance Finance Company PLC has investments in subsidiary Alfinco Insurance Brokers (Pvt) Ltd (63.94%) and an associate entity, Macbertan (Pvt) Ltd (22.45%).
During FY2020, AFC reported a PAT of LKR 209 Mn on a total asset base of LKR 33.9 Bn as compared with a PAT of LKR 306 Mn on a total asset base of LKR 32.1 Bn in the previous financial year. During 6MFY2021, AFCP reported a PAT of LKR 171 Mn on a total asset base of LKR 34.9 Bn.
During FY2020, AFC Group reported a PAT of LKR 240 Mn on a total asset base of LKR 34.1 Bn as compared with a PAT of LKR 334 Mn on a total asset base of LKR 32.2 Bn in the previous financial year. During 6MFY2021, AFC reported a PAT of LKR 189 Mn on a total asset base of LKR 35.1 Bn.
Key audited financial indicators
|Net Interest Income||3,272||3,589||3,891||1,863|
|Profit after Tax||728||306||209||171|
|Loans and Advances, net||25,494||25,366||26,244||27,141|
|Return on Equity||17.42%||6.95%||4.59%||7.22%|
|Return on Assets||2.36%||0.96%||0.63%||0.99%|
Rating history for last three years:
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