Prime Finance PLC

ICRA Lanka reaffirms the issuer rating of Prime Finance PLC

InstrumentRated AmountRating Action
Issuer ratingN/A[SL]BBB- (Stable); Reaffirmed

Rating action

ICRA Lanka Limited has reaffirmed the issuer rating of Prime Finance PLC (PRIM or the Company) at [SL]BBB- (Pronounced SL Triple B minus). The outlook on the rating remains stable.

Rationale

The rating continues to factor in the financial, operational and management support from the Prime group; Prime Lands Private Limited (rated [SL]A- (Stable) by ICRA Lanka) and holds about 87% stake in PRIM. The rating also takes into consideration, PRIM’s modest scale, less seasoned portfolio and moderated profitability indicators. The rating also takes cognizance of the deterioration of the asset quality indicators of the Company, largely on account of the challenging macro conditions that prevailed during the period and depletion of the portfolio. ICRA Lanka notes that the Company’s current core capital, which stood at about LKR 2.26 Bn as in March 2021, meets the regulatory minimum of LKR 2.0 Bn as at January 2021. However, funding support is required to meet the upcoming regulatory minimum capital requirement of LKR 2.5 Bn. ICRA Lanka, however, factors the willingness and ability of the parent company to extend further capital and liquidity support to PRIM when required as demonstrated in the past. Going forward, the Company’s ability to raise the additional capital in a timely manner and its ability to improve overall asset quality indicators would be crucial from a rating point of view.

Outlook: Stable

The Stable outlook factors in the timely overall support from the Prime group. The outlook may be revised to “Positive” basedThe Stable outlook factors in the timely overall support from the Prime group. The outlook may be revised to “Positive” based on PRIM’s ability to grow its portfolio and improve its earnings profile and asset quality indicators, while maintaining a healthy capital profile. The outlook may be revised to “Negative” in case PRIM is unable to meet the regulatory capital requirement in a timely manner or in case of a significant deterioration in its asset quality indicators or lower than expected support from the Prime group.

Key rating drivers

Credit strengths

Part of Prime group, the largest real-estate company in Sri Lanka: PRIM is 87% owned subsidiary of Prime Lands (PVT) Limited, the market leader in the residential real estate sector in Sri Lanka. Prime Group has demonstrated a track record of providing capital and managerial support to the NBFI subsidiary; during the FY2018, the parent infused around LKR 284 Mn in fresh capital through a rights issue. A further infusion of around LKR 864 Mn was made during the FY2019 and LKR 527 Mn was also made by December 2020. The parent has also indicated their willingness and ability to infuse additional capital, for PRIM to meet the minimum capital requirements stipulated by the CBSL. In addition to capital, Prime Group provides strategic and operational support through corporate guarantees. ICRA Lanka expects the parent group to have strong operational ties with PRIM through sharing the same brand and through complementary products (e.g. real estate loans).

Higher exposure to asset-backed lending: As in March 2021, PRIM’s portfolio almost entirely (93%) consisted of asset-backed lending through real estate backed loans and vehicle leasing; real estate backed exposure accounted for over 66% of the total portfolio, while the remaining was accounted for by vehicle leasing. While real estate backed lending will be an integral part of the portfolio going forward, due to the support from the parent company, PRIM plans to increase its exposure to vehicle leasing, through high-yielding categories such as 3-wheelers.

Credit challenges

Small scale of operations and relatively unseasoned portfolio: PRIM is a relatively small player in the NBFI industry with a portfolio of about LKR 4.2 Bn as in June 2021. Since the acquisition by the Prime Group in January 2017, the company has aggressively grown its real estate backed lending portfolio, by exploiting the synergies with the parent group. However, the portfolio has moderated over the last 12 months (from about LKR 5.1 Bn in June 2020), due to the challenging macro-outlook owing to the COVID-19 pandemic. ICRA Lanka notes that the average tenure of these products is about five years, and the portfolio remains relatively new and unseasoned up to now.

Weak asset quality indicators, largely due to the challenging macro conditions: PRIM reported a Gross NPA of 20.21% as in Mar-21 (26.70% in Dec-20) and 21.17% as in Mar-20 (5.52% in Mar-19), compared to the Licensed Finance Company (“LFC”) sector’s gross NPA of 11.31% in March 2021. Significantly weak asset quality indicators are partly due to depletion of the portfolio and the challenging macro-political environment. ICRA Lanka notes that the company has recorded particularly high NPAs in its SME/ business related lending exposures (discontinued products) while the core real estate backed products such as Easy loans have better asset quality indicators. The rating takes some comfort in improved collection from April 2020 and improvements in delinquency levels noted in March 2021; absolute GNPAs have reduced to about LKR 1Bn by March 2021, from the highest levels of LKR 1.58Bn in June 2020. However, ICRA Lanka notes that the potential impact of the 3rd wave of the pandemic is yet to be seen. The NPA provision coverage of the company stood at 51.66% in Mar-21, while the IFRS stage 3 provision coverage stood at around 32%. Going forward, the company’s ability to arrest incremental slippages and reduce the NPAs are crucial from a rating point of view.

Shortfall in regulatory minimum capital, however, the parent company is expected to provide capital support in the immediate to short term: As in March 2021, adjusted core capital position of PRIM stood at about LKR 2.26 Bn, which is LKR 240 Mn below the upcoming minimum capital requirement of LKR 2.5 Bn by January 2022 as stipulated by the CBSL. Presently the Company is in compliance with the current minimum core capital requirement of LKR 2 Bn. The company expects to meet the capital requirement of LKR 2.5 Bn by internal generation and an issue of shares, if necessary, to bridge the shortfall. From the risk-weighted capital adequacy ratio point of view, the position of PRIM remains comfortable as the Core CAR stood at 33.72% against the regulatory minimum of 6.50% as of March 2021. The total CAR also remained at 34.80% against the regulatory minimum of 10.50% as of March 2021. Higher risk weighted capital adequacy ratios are on account of the modest portfolio size.

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:

Prime Finance PLC (PRIM), a registered finance company, is largely focusing on real estate backed loans and leasing. PRIM was established in 2004 as Asia Commerce Limited and was registered as a finance leasing establishment in 2005. In 2011, the Company was registered under the Finance Companies Act and was rebranded as Divasa Finance Limited. The Company went through a name change in 2012 as George Steuart Finance Limited and was listed on the Colombo Stock Exchange by way of an Introduction. Under the financial sector consolidation programme of the Central Bank of Sri Lanka, the Company was acquired by Sarvodaya Development Finance Limited (formerly known as Deshodaya Development Finance Company Ltd) in 2014 and changed the name of the Company to Summit Finance PLC in 2016. The current shareholders, Prime Lands (Pvt) Ltd. acquired the Company in January 2017 and changed the name to Prime Finance PLC. Prime Lands (Pvt) Ltd. presently holds 87% of PRIM.

During the year ended March 31, 2021, PRIM reported a net profit of LKR 46 Mn on a total asset base of LKR 7,160 Mn as compared to the net profit of LKR 71 Mn on a total asset base of LKR 6,242 Mn in the previous fiscal year. For the three months ended June 30, 2021, PRIM reported a net profit of LKR 25 Mn (unaudited) on a total asset base of LKR 6,951 Mn.

Key financial indicators
FY18FY19FY20FY21
Net Interest Income236539584426
Profit after Tax131797146
Net worth (adjusted)[1]6131,6211,6922,264
Total Assets3,6715,7066,2427,160
Return on Equity2.82%15.99%4.31%2.32%
Return on Assets0.49%3.81%1.21%0.69%
Gross NPA7.34%5.52%21.17%20.21%
Net NPA2.78%0.32%10.96%5.23%
Gearing4.612.372.461.98

[1] Networth = Total Equity-Revaluation – Goodwill

Rating history for last three years:

Analysts
Sanduni Kankanamalage
+94-777478138
sanduni@icralanka.com  

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

[1] Networth = Total Equity-Revaluation – Goodwill


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