LOLC Development Finance PLC

ICRA Lanka reaffirms the issuer rating of LOLC Development Finance PLC

InstrumentRated Amount (LKR Mn)Rating Action
Issuer ratingN/A[SL]A- (Stable); reaffirmed

Rating action

ICRA Lanka Limited has reaffirmed the issuer rating of [SL]A- with stable outlook for LOLC Development Finance PLC (“LDFP”/”the Company”, formerly known as BRAC Lanka Finance PLC)

Rationale

The LOLC Group holds about 99% stake (LOLC Holdings PLC 55.55% and Commercial Leasing & Finance PLC 44.34%) in the Company as in September 2020. The rating reflects the significant operational, managerial and financial support from the LOLC group. The rating takes note of the modest credit profile of LDFP’s borrowers and its weakened asset quality and earnings profile. ICRA Lanka takes note of the currently adequate capital structure and asset liability maturity profile of the Company. LDFP’s ability to improve the credit quality and earnings by controlling new slippages and maintaining an adequate capital profile would be crucial from a rating perspective.

Outlook: Stable

ICRA Lanka believes that LOLC group will continue to provide timely and adequate capital support to LDFP. The outlook may be revised to ‘Negative’ in case of further weakening in the asset quality indicators and profitability of the Company. The outlook maybe revised to ‘Positive’ in case of significant improvement in asset quality, profitability and capitalisation of the Company.

Key rating drivers

Credit Strength

Continuous financial and managerial support from the parent company; LDFP is a 99% subsidiary of the LOLC group with 55% and 44% being held by LOLC Holdings PLC (LOLC) and Commercial Leasing & Finance PLC (CLC) respectively. LOLC group has continued to provide financial, managerial, and operational support to the Company; the Company also benefits from sharing the group brand name. Going forward, the holding company has also committed funding support for future expansions of the Company. LOLC provides operational and managerial support to the Company through its shared service framework.

Adequate near-term capital and liquidity profile; LDFP reported a regulatory Tier I ratio (“Tier I”) and Capital Adequacy Ratio (“CAR”) of 11.1% and 12.0% in June 2020, as compared to the regulatory requirement of 6.5% and 10.5%. The Company reported a core capital base of LKR 2.7 Bn, compared to the regulatory requirement of LKR 2.0 Bn (LKR 2.5 Bn by December 2021). The gearing was reported at 5.7 times in June 2020 vis-à-vis 4.9 times in September 2019. Going forward also, ICRA Lanka expects LDFP to maintain adequate capitalization and funding profiles, with the group support.

Credit Challenges

Modest credit profile of the target customers: The rating factors the modest credit profile of LDFP’s target customer base, as the Company is primarily focused on micro-related lending. The Company offers Micro-finance Group loans, Micro Individual loans, Micro Enterprise Development loans, Micro Housing loans and micro leasing for used 3wheelers to its customers. ICRA Lanka notes that LDFP has shifted its exposure profile from traditional group micro-finance loans to individual loans and asset backed loan products. As in June 2020, the gross portfolio stood at LKR 17.1 Bn, vis-à-vis LKR 16.3 Bn in March 2020 and LKR 14.2 Bn in September 2019. The Company’s GNPA ratio stood at 8.9% in June 2020, increased from 7.7% in September 2019 and 8.0% in March 2020. The Company’s ability to maintain the quality of the new credit generations and control new slippages would be key rating sensitivities.

Weakened earnings profile due to NIM moderation and increased credit cost: During the 6M ended September 2020, LDFP witnessed a moderation in profitability, due to NIM compression (NIM[1] for the 6M ended September 2020 was 14.8%, vis-à-vis 17.9% in FY2020 and 18.2% in FY2019) and higher credit cost. The Company saw a sharp increase in credit cost (Provisions/ATA was 5.2% during the 6MFY2021, vis-à-vis 13.4% in FY2020) due to the asset quality deterioration during the period. For the 6MFY2021 LDFP reported a PAT of LKR 31 Mn, compared to the PAT of LKR 109 Mn in FY2020. Going forward, maintaining core lending margins and, controlling credit costs would be crucial for incremental profitability.

Analytical approach: The rating reflects the significant operational, managerial and financial support from the LOLC group.  For arriving at the ratings, ICRA has applied its rating methodologies as indicated below.

Links to applicable criteria:  ICRA Lanka’s Credit Rating Methodology for Non-Banking Financial Institutions

About LOLC Group:

Setup in 1980, LOLC Holdings PLC has evolved itself from a financial services provider to a holding company which also has interests in manufacturing, trading, plantations, leisure and energy. The ORIX Corporation of Japan which had 30% of LOLC since its inception, had divested the same in 2018. The group has diversified geographically into Cambodia, Myanmar, Indonesia, Pakistan, Maldives and in the African region.

On April 10, 2020, LOLC Group has divested 70% of its stake in PRASAC for a total consideration of about USD 603 Mn. The investment was held by LOLC International Private Limited(LOLCIPL), a fully owned subsidiary of LOLC holdings, incorporated in Singapore.

During FY2020, LOLC group reported a consolidated PAT of LKR 19.8 Bn on a total asset base of LKR 1,336 Bn, as compared to the PAT of LKR 19.6 Bn on a total asset case of LKR 1,044 Bn in the previous financial year. For the 6M ended the group reported a PAT of 41.3 Bn, including a gain the LKR 42.9 Bn gain on PRASAC divestment. The consolidated asset base has moderated to about LKR 778 Bn as in September 2020, with the above divestment.

Key financial indicators – LOLC (Consolidated)
In LKR MnFY2019FY20206MFY2021
Net Interest Income53,90962,17417,518
Profit after Tax19,61819,79241,279
Net worth141,183202,348203,360
Loans and Advances706,789897,447398,799
Total Assets1,043,9151,335,919778,283
Return on Equity14.56%10.86%38.79%
Return on Assets2.10%1.66%7.81%
Gearing (times)5.95.32.6

Note: Net worth and gearing, adjusted for revaluation reserves and deferred tax

About LDFP:

BRAC International established its Sri Lankan operations as an NGO in 2004 to serve the tsunami affected community in southern and eastern provinces. Subsequently, along with LOLC as a joint venture, it acquired Nanda Finance PLC (incorporated in 1961) to extend microfinance. In 2014, the Company became a wholly owned subsidiary of Commercial Leasing & Finance PLC (CLC, 99% owned subsidiary of LOLC), when BRAC International divested its holding. In May 2017, LDFP raised additional capital amounting to LKR 1.3 Bn by way of a rights issue which was fully subscribed by LOLC. Post the rights issue, LOLC became the largest shareholder with a 55.6% holding, while CLC held 44.3% share.  LDFP is a licensed finance company and it is in the business of providing group microfinance, micro lease and individual loans to its customers. During the FY2020, LDFP reported a PAT of LKR 109 Mn on a total asset base of LKR 18.4 Bn, compared to the loss of LKR 154 Mn on a total asset base of LKR 13.8 Bn during the same period, previous fiscal. For the 6M ended September 2020, the Company reported a PAT of LKR 31 Mn on a total asset base of LKR 18.8 Bn.

Key financial indicators-LDFP
In LKR MnFY2019FY2020HIFY2021 (Unaudited)
Net Interest Income2,7502,6531,295
Profit after Tax(154)10931
Net worth2,5592,6622,698
Loans and Advances11,13415,25116,125
Total Assets13,83918,41518,813
Return on Equity(5.71%)4.19%2.31%
Return on Assets(1.01%)0.68%0.33%
Gross NPA7.44%8.02%9.83%
Capital Adequacy Ratio (Tier 1)14.18%11.23%11.07%
Gearing (times, adjusted for revaluation reserves)4.294.754.41

Rating history for the last three years:


[1] Net interest income/ Average total assets

Rasanga Welliwatte
+94-11-4339907
rasanga@icralanka.com  

Sahil Udani
+91-22-61143429
Sahil.udani@icraindia.com

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