LCB Finance PLC

ICRA Lanka reaffirms the Issuer Rating of Lanka Credit and Business Finance PLC

Instrument Rated Amount (LKR Mn)Rating Action
Issuer RatingN/A[SL]B+ with Stable outlook; reaffirmed

Rating action

ICRA Lanka Limited has reaffirmed the Issuer Rating of [SL]B+ (pronounced S L B plus) with Stable outlook for Lanka Credit and Business Finance PLC (“LCF” or the Company).

Rationale

The rating considers LCF’s limited track record, relatively small scale of operations and modest competitive position in the non-banking finance sector. Nonetheless, LCF was able to demonstrate a healthy portfolio growth of 34% YoY, though on a small base which increased its portfolio size to LKR 3.4 Bn in Mar-22. The rating also considers the improvement in the return ratios with a return on equity (RoE) of 5.93% in FY2021 (1.39% in FY2020), but same remained lower compared to the industry average of 20.83%[1] in March 2022. This coupled with successive capital infusions such as LKR 600 Mn through a rights issue in FY2021 and LKR 500 Mn via an initial public offering (IPO) held in November 2021 supported the capitalisation profile. As a result, LCF reported a net worth of LKR 2.7 Bn in Mar-22 (LKR 2.1 Bn in Mar-21) against the regulatory minimum capital requirement of LKR 2.5 Bn for Licenced Finance Companies (LFCs). The Tier 1 and Total CAR both remained healthy at 51% in Mar-22, against the regulatory minimums of 7.0% and 11.0%, respectively.

The rating also considers improvement in the asset quality with a decline in the Gross NPA (GNPA) ratio to 7.83% in Mar-22 (7.65% in the active portfolio) vis-à-vis 9.30% in Mar-21 (9.01% in the active portfolio); which is lower than the industry average of 9.0% in March 2022. The improvement was largely due to growth in the active portfolio and write-off of LKR 306 Mn in FY2021. ICRA Lanka also takes cognizance of the comfortable liquidity profile with a short-term (< 1 year) ALM mismatch of positive 14% in Mar-22 (positive 30% in Mar-21) as the entity is largely equity funded. Going forward, LCF’s ability to further improve its asset quality, particularly that of its core SME segments will be crucial from a rating point of view. Ability to maintain healthy capitalization, liquidity and earnings would also be key from a rating perspective.

Outlook: Stable

The outlook may be revised to “Positive” if the Company demonstrates a steady improvement in the asset quality indicators and an adequate capital profile over the medium term, while maintaining a track record of profitable portfolio growth. The outlook may be revised to “Negative” in case LCF breaches the regulatory minimum capital requirements, or if its asset quality or earnings profiles weakens.

Key rating drivers

Credit strengths

Improvement in the capitalization profile, backed by successive capital infusions: As in March 2022 LCF’s TNW stood at LKR 2.7 Bn (LKR 2.1 Bn in March 2021), compared to the regulatory minimum of LKR 2.5 Bn. ICRA Lanka notes that the company has been able to improve its capital profile through successive capital infusions. LCF raised LKR 600 Mn via a rights issue in FY2021. Further, the company raised LKR 500 Mn through an IPO held in November 2021. The capital raised enabled the company to meet the higher regulatory core capital requirement of LKR 2.5 Bn effective from Dec-21. The rating takes comfort from the consistent track record of the promoters in infusing capital. LCF’s Tier 1 and Total Capital Adequacy Ratios (CAR) both stood at 51%in March 2022, comfortably above the regulatory thresholds of 7.0% and 11.0%, respectively. The rating also takes comfort from Central Bank of Sri Lanka’s (CBSL) recognition of LCF as a Category A NBFI[2], despite its smaller size and modest franchise.

Improved earnings profile: The company’s net interest margin (NIM) remained healthy at 10.10% in FY2022 vis-à-vis 9.92% in FY2021, mainly due to the large exposure to high yielding business loans (45% of the total portfolio as on Mar-22) which is LCF’s core product. The lending rate of business loans remain in the range of around 28-30% at present (20-23% in the prior years). A provision reversal of LKR 62 Mn in FY2022 (LKR 23 Mn credit cost in FY2021) had also benefitted the earnings profile, with the provisions/ATA at -1.53% (0.68% in FY2021). Further, the operating expenses/ATA have remained range-bound at 6.50% -7.00% in the last five fiscals due to growth in scale and good cost control measures. Overall, LCF was able to report a net profit of LKR 143 Mn in FY2022 vis-à-vis LKR 25 Mn in FY2021. The company’s RoE and RoA  stood at 5.93% and 3.55%, respectively, in FY2022 vis-à-vis 1.39% and 0.74%, respectively, in FY2021. Going forward, the company’s ability to maintain core margins and effective control of its credit costs and operating expenses, would be the key drivers of LCF’s profitability.

Comfortable liquidity profile: As in March 2022, LCF has a positive ALM mismatch of 14% in the less than 1-year bucket vis-à-vis 30% in March 2021. The company’s liquidity profile is comfortable as the entity is largely equity funded (gearing is only 0.53x in Mar-22), and the fixed deposit exposure is about 38% of the total funding base. In light of the high interest rates currently, the management does not envisage further accelerating the deposit base. However, ICRA Lanka notes that the deposit base is highly concentrated with the top 10 deposits accounting for about 56% of the total deposit base as in Mar-22 (45% in Mar-21).

Credit challenges

Limited track record, small scale of operations and modest competitive position: LCF has a limited track record as the company was taken over by Lanka Credit and Business Limited (LCB) in Apr-18; the entity was dysfunctional at that time. LCF’s gross portfolio had grown to about LKR 3.4 Bn as of Mar-22 from LKR 2.5 Bn in Mar-21. The company’s portfolio at present accounts for less than 1% of the Non- Banking and Financial Industry (NBFI) advances; thus, is modest in scale. As in Mar-22, the legacy portfolio had reduced to LKR 6.5 Mn, after a significant write-off of about LKR 306 Mn which was fully provided for. As of Mar-22, the portfolio mostly consisted of loans, leasing and HP, and gold loans which accounted for 78%, 17% and 3%, respectively of the total portfolio. The loans segment mostly consists of business purpose loans (45% of the portfolio), revolving loans (13%), housing loans (7%) and personal loans (5%) as on Mar-22 . The leasing & HP portfolio reported 56% YoY growth as of Mar-22 due to the  nation-wide vehicle import restrictions which had increased the demand for existing vehicles, and consequently the demand for leasing. LCB had started gold loans in Oct-18 and plans to promote the same as opposed to pawning, because of the flexibility in recovery. Management also plans to further increase its leasing portfolio to about 40% of the total portfolio.

Moderate asset quality indicators: LCF’s asset quality indicators were moderate with the GNPA ratio reduced to 7.83% as in Mar-22 (7.65% in the active portfolio), from about 9.30% in Mar-21 (9.01% in the active portfolio). ICRA Lanka notes that portfolio growth and the write-off from the legacy portfolio in FY2021 (which had been entirely non-performing for a long period) had contributed to the reduction in the GNPA%. The absolute NPA portfolio stood at LKR 264 Mn in Mar-22 vis-à-vis LKR 234 Mn in Mar-21 (LKR 569 Mn in Mar-20). LCF’s GNPA% is below than the NBFI sector GNPA% of 9.0% as on Mar-22 . Nonetheless, ICRA Lanka takes cognizance of the relatively higher NPAs of its core products such as business loans (11.18%) and housing loans (15.20%), which collectively accounted for about 53% of the total portfolio in Mar-22 . However, the asset quality levels of the leasing & HP portfolio (GNPA% of 1.50%) and the gold loan portfolio (nil GNPA% ) remain healthy, wherein the management expects to grow these two products over the medium term. LCF’s NPA coverage ratios are comfortable with 82.95% NPA coverage and 1.64% Solvency (Net NPA/Networth) in Mar-22. The stage 3 provision coverage was about 23.40% in the same period. Going forward, the company’s ability to reduce NPAs further in the core segments would be crucial from a rating perspective.

Analytical approach: For arriving at the ratings, ICRA Lanka has applied its rating methodologies as indicated below.

Links to applicable criteria: ICRA Lanka Credit Rating Methodology for Non-Banking Finance Companies

About the Company:

LCB Finance PLC (LCF) is a licensed Finance Company providing an array of products including Leasing, Hire Purchase, Business loans, Gold loans, Micro Finance, and Factoring. The Company was incorporated in 1962 as Industrial Finance Limited. In 2008, the ownership of the Company was transferred to ASPIC group and subsequently to Millennium group in 2009. The Company went through a name change in 2012 as City Finance Limited. In April 2018, under the guidance of Central Bank of Sri Lanka, LCB Limited (LCB), took over the Company and renamed it as LCB Finance Limited. LCB transferred its assets and liabilities to LCF during May 2018 and became its holding company. As of Mar-22, LCB Limited held 72.08% of LCF. For  FY2022, LCF reported a net profit of LKR 143 Mn on a total asset base of LKR 4.4 Bn, compared to a net profit of LKR 25 Mn on a total asset base of LKR 3.7 Bn in the previous fiscal year.

Key financial indicators:
LKR MnFY2020 (Audited)FY2021 (Audited)FY2022 (Unaudited)
Net Interest Income 292 348408
Profit after Tax 11 25143
Net worth 1,483 2,1072,727
Loans and Advances (Net) 1,812 2,3063,027
Total Assets 3,105 3,6734,401
Return on Equity0.81%1.39%5.93%
Return on Assets0.39%0.74%3.55%
Gross NPA23.06%9.30%7.83%
Net NPA2.93%-1.78%1.33%
Capital Adequacy Ratio29.17%56.43%51.34%
Gearing (times) 1.00 0.620.53
Rating history:

Analysts
Apsara Thurairetnam
Senior Analyst
+94-766781590
apsara@icralanka.com

Niraj Jalan
Assistant Vice President
+91-33-71501146
niraj.jalan@icraindia.com

[1] Annualized

[2] These entities are considered compliant in terms of capital rules of the CBSL and able to withstand losses during a crisis/macro shock.


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