Multi Finance PLC

ICRA Lanka reaffirms the issuer rating of Multi Finance PLC

InstrumentRated Amount (LKR Mn)Rating Action
Issuer RatingN/A[SL]C+ (Negative); Reaffirmed

Rating action

ICRA Lanka Limited has reaffirmed the Issuer Rating of Multi Finance PLC (MFP or the Company) at [SL]C+ (Pronounced S L C plus) with Negative outlook.

Rationale

The rating reaffirmation factors in the continued weakness in MFP’s capital adequacy, asset quality and earnings profiles. The Company’s tangible net worth (adjusted for deferred tax) of about LKR 462 Mn as of Sep-21, continues to remain well below the minimum regulatory capital requirement of the Central Bank of Sri Lanka (CBSL), as the planned capital raising initiatives were derailed by the challenging macro-environment that prevailed during the period. The failure to meet the regulatory capital has led to the imposition of lending and deposit-taking restrictions by the CBSL. ICRA Lanka also notes that the sharp contraction of the overall lending portfolio has resulted in the gross NPA ratio increasing to about 48.9% in Jun-21 vis-à-vis 45.0% in Mar-21 and 38.9% in Mar-20, even though the non performing accomadation got reduced to LKR 363 Mn in Jun-21 from LKR 418 Mn in Mar-20. MFP’s overall profitability remains weak, where the Company reported a net loss of LKR 32 Mn during the 6M ended Sep-21, vis-à-vis LKR 83 Mn loss reported during FYE Mar 21. Going forward, it would be crucial for the Company to complete the ongoing merger in a timely manner, as regulatory restrictions, on account of non-compliance of core capital, are significantly affecting the overall business of the NBFI, and it is less likely, that the regulator will provide further extensions to the time-lines.

Outlook: Negative

The Negative outlook reflects the weak asset quality and earnings profile of the Company along with the contraction of the overall lending portfolio. The rating may be downgraded in case of further deterioration in asset quality, solvency, liquidity or earnings profiles and the inability of the Company to meet the minimum regulatory capital requirement in a timely manner.

Key Rating Drivers

Credit Challenges

Sizeable external capital required to meet regulatory core capital requirement: As of  Sep-21, tangible net worth (adjusted for deferred tax) of Multi Finance (MFP) stood at about LKR 462 Mn, which is significantly below the current minimum core capital requirement of LKR 2 Bn (and LKR 2.5 Bn by January 2022), as stipulated by the regulator. Non-compliance on minimum capital by MFP has led to the CBSL imposing a lending cap of LKR 1.3 Bn and a deposit cap of LKR 600 Mn, a measure that has affected the growth of the Company. However, the core CAR and total CAR ratios of the Company stood at 53.2% in Mar-21 and 61.4% in Sep-20, which is above the required level.  ICRA Lanka notes that the planned capital raising initiatives that were in the pipe-line have got derailed due to the COVID-19 outbreak. However, ICRA Lanka notes that the Company has finalized an acquisition/merger under the CBSL master plan for consolidation for NBFI sector. As per the management, the Company is currently at advanced stages of finalizing and obtaining approval from the regulator.

Significant deterioration of asset quality indicators: GNPA ratio of MFP stood high at 48.9% in Jun-21, compared to 45.0% in Mar-21 and 38.9% in Mar-20. ICRA Lanka notes that the moderation of the overall portfolio has also contributed to the sharp increase in NPA ratios during the period. Absolute gross NPAs of the Company stood at LKR 359.8 Mn as in Jun-21, compared to 343.2 Mn in Mar-21 and LKR 410.5 Mn in Mar-20. The Company is currently not involved in much active lending due to capital constraints and the on-going merger exercise.

Weak profitability: For the 6M ended Sep-21, Multi Finance reported a net loss of LKR 32 Mn, vis-à-vis LKR 83 Mn loss in FY21 and LKR 142 Mn loss reported during FY20. Sustained losses for the 6M period were primarily due to the portfolio reduction. ICRA Lanka notes that the Company has failed to post pre provision profit since FY16, and the poor earnings profile of the Company is laregly due to the capital shortage and the resultant regulatory restrictions.

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:

Multi Finance PLC (MFP) is a licensed Finance Company providing an array of products such as Leasing, Hire Purchase, Business loans, Multi draft, SME financing, Pawning, Micro Finance, and Trader financing etc. The Company was incorporated on October 14, 1974 as a limited liability Company in Kandy. The ordinary shares of the Company were listed on the Colombo Stock Exchange in 2011. In February 2017, Fairway Holdings (Pvt) Ltd., a diversified conglomerate acquired 65% of MFP.

During the year ended March 31, 2021, MFP reported a net loss of LKR 83 Mn on a total asset base of LKR 870 Mn as compared to net loss of LKR 142 Mn on a total asset base of LKR 1,195 Mn in the previous fiscal year. For the 6M ended September 30, 2021, MFP reported a net loss of LKR  32 Mn on a total asset base of LKR 806 Mn.

Key financial indicators (Audited)
Amount in LKR MnFY2019FY2020FY2021 6MFY2022 (Unaudited)
Net Interest Income171112 68 37
Profit after Tax(63)(142) (83) (32)
Reported Net worth718577 493 461
Loans and Advances1,181862 556 482
Total Assets1,4851,195 870 806
Return on Equity-8.3%-21.9%-15.4%-13.5%
Return on Assets-4.1%-10.6%-8.0%-7.7%
Gross NPA11.6%38.9%45.0%48.9%**
Net NPA4.5%18.4%15.1%17.3%**
Capital Adequacy Ratio39.9%*54.61%53.18% 
Gearing (times)1.11.0 0.6 0.6

*based on new capital adequacy computation came into effect in Jul-18 

 ** As at Jun-21

Rating history for last three years:
Analysts
Sanduni Kankanamalage
+94-777478138
sanduni@icralanka.com    

Rasanga Weliwatte
Head of Finance Sector Ratings
+94-773553564
rasanga@icralanka.com

Disclaimer
ICRA Logo

Subsidiary of ICRA Limited

CORPORATE OFFICE
Level10, East Tower, World Trade Center, Colombo 01, Sri Lanka
Tel:+94 11 4339907;Fax:+94112333307 Email:info@icralanka.com; Website:www.icralanka.com

© Copyright, 2021 ICRA Lanka Limited. All Rights Reserved. Contents may be used freely with due acknowledgement to ICRA Lanka.

ICRA Lanka ratings should not be treated as recommendations to buy, sell or hold the rated debt instruments. ICRA Lanka ratings are subject to a process of surveillance, which may lead to revision in ratings. An ICRA Lanka rating is a symbolic indicator of ICRA Lanka’s current opinion on the relative capability of the issuer concerned to timely service debts and obligations, with reference to the instrument rated. Please visit our website www.icralanka.com or contact ICRA Lanka’s office for the latest information on the outstanding ICRA Lanka ratings.

All information contained herein has been obtained by ICRA Lanka from sources believed by it to be accurate and reliable, including the rated issuer. ICRA Lanka however has not conducted any audit of the rated issuer or of the information provided by it. While reasonable care has been taken to ensure that the information herein is true, such information is provided ‘as is’ without any warranty of any kind, and ICRA Lanka in particular, makes no representation or warranty, express or implied, as to the accuracy, timeliness or completeness of any such information.

ICRA Lanka does not take any responsibility for accuracy of material/documents prepared or published by other parties based on this document. All ICRA Lanka official rating rationales are prepared in English and external parties may present or publish translated versions of the same. Readers are henceforth advised to refer to the ICRA Lanka’s official rating rationale in the event of any inconsistency found in such documents.

ICRA Lanka or any of its group companies may have provided services other than rating to the issuer rated. All information contained herein must be construed solely as statements of opinion, and ICRA Lanka shall not be liable for any losses incurred by users from any use of this publication or its contents.