ICRA Lanka reaffirms the ratings of Commercial Credit and Finance PLC
ICRA Lanka Limited has reaffirmed the issuer rating of Commercial Credit and Finance PLC (CCFL or the Company) at [SL]BBB (Pronounced SL triple B) with Negative outlook. ICRA Lanka has also reaffirmed the short-term rating of [SL]A3 to the Company’s commercial paper programme of LKR 1,000 Million. Also, ICRA Lanka has withdrawn the issue rating of [SL]AA-(SO) (pronounced SL Double A Minus Structured Obligation) with Stable outlook for the LKR 1,000 Million guaranteed subordinated redeemable debenture programme of the Company, as the said debenture is fully redeemed by the Company.
ICRA Lanka has also reaffirmed the issue rating of [SL]A+(SO)1 (pronounced SL A plus Structured Obligation) rating with stable outlook for the LKR 2,000 Mn guaranteed subordinated redeemable debentures programme, which is currently listed on the Colombo Stock Exchange. This rating is based on the strength of the unconditional and irrevocable guarantees from Sampath Bank PLC (Sampath) and HNB covering the principal and two interest installments (semi-annual) of the debenture programme. Each guarantor undertakes the obligation to pay, on demand from the Trustee, LKR 1,000 Mn, being 50% of the total principal sum of LKR 2,000 Mn and, one half-yearly interest installment of the Subordinated Redeemable Debentures. The rating also assumes that the guarantees will be duly invoked by the Trustee, as per the terms of the underlying Trust deed and guarantee agreements, in case there is a default in payment by CCFL.
The reaffirmation of the ratings with a Negative outlook factors in the continued weakness in CCFL’s asset quality profile and stretched liquidity profile. CCFL’s gross NPA ratio increased to 9.9%% as of March 2020 vis a vis 6.5% as of March 2020 (7.0% as of March 2018), largely due to the successive macro-shocks affecting the economy. However, gross NPA has improved marginally in June 2020, to about 9.8%, compared to the NBFI sector NPA of about 16% during the same period. The ALM mismatch (in <1-year bucket) has widened to -14.7% as of March 2020 vis a vis -13.4% as of March 2019, largely because of the shift in the portfolio towards longer term leasing products. The rating continues to factor in CCFL’s established business presence in Sri Lanka and the experienced senior management team, its adequate profitability indicators and capital structure. The rating also takes comfort from the increasing in asset backed exposures of CCFL over the last 3 – 4 years. Asset-backed lending has increased to about 91% of the overall portfolio, from about 60% in March 2017 (85% in March 2019).
The Negative outlook reflects the continued weakness in CCFL’s asset quality indicators and stretched liquidity position. The outlook may be revised to ‘Stable’ in case of steady improvement in CCFL’s asset quality and liquidity position while maintaining a comfortable capital and earnings profile. The ratings may be downgraded in case of a further deterioration in asset quality or liquidity profile or if the capital and earnings profile of the Company weakens.
Key rating drivers
Established franchise and experienced senior management team: CCFL is one of the large non-banking financial institutions in Sri Lanka with an asset base of about LKR 80 Bn as of March 2020 and has its presence Island wide through its 118-branch network. The promoter/CEO and the senior management team are experienced professionals in financing business. The Company particularly has a good franchise in the micro-segment, due to its pioneering position. CCFL has been consistently profitable over the last 10-years, while achieving growth.
Increasing in asset-backed exposures: CCFL has strategically shifted its portfolio from unsecured lending (mainly in the form of micro-lending) to asset-backed products (2W, 3W leasing, and gold loans) over the last 4-5 years. Asset-backed lending has increased to about 91% of the overall portfolio as in March 2020, from about 60% in March 2017 (85% in March 2019). As in March 2020, the top portfolio exposure of CCFL was for 3W leasing, which accounted for about 28% of the total portfolio, followed by 2W leasing, which accounted for about 25% of the total portfolio. As in March 2020, vehicle leasing as a whole accounted for close to 70% of the total portfolio, while loan products accounted for the balance 30%. Going forward, the management expects to maintain a minimum of 90% exposure to asset-backed lending, while unsecured products such as micro-finance will be done on a selective basis. However, ICRA Lanka notes that, notwithstanding the increasing exposure to asset backed lending, the core customer base of CCFL mainly comprises of individuals with modest credit profiles, who are susceptible to volatile economic conditions.
Adequate capital structure: CCFL’s risk-weighted core capital adequacy stood at 14.14% in March 2020 (13.02% in March 2019), well above the regulatory minimum of 6.5%. Moderation of overall portfolio growth, as well as curtailment of unsecured lending, have contributed to the improvement in capital adequacy levels. Adjusted gearing for March 2020 stood at about 4.9 times, vis-à-vis 5.5 times in March 2019. CCFL’s tangible net worth stood at about LKR 12.8Bn, well above the minimum core capital requirement of LKR 2.5 Bn for NBFIs. Going forward also, it will be important for the Company to maintain adequate capital buffers, in relation to the regulatory requirements.
Adequate profitability, though declining over the period: Historically, CCFL has been able to maintain healthy profitability indicators, mainly on account of high lending yields on its portfolio. However, the overall profitability has moderated as the Company has shifted its portfolio from high yielding unsecured lending to asset-backed lending. During FY2020, NIM has moderated to 11.8% from about 14.6% in FY2019; NIM was around 16% during FY2015 and FY2017. ROA for FY2020 was 1.95% vis-à-vis 2.54% in FY2019 and 2.82% in FY2018. Going forward, it is crucial for the Company to improve its credit cost and operational expenses, as the room for net interest margin expansion will be somewhat limited.
Weak asset quality indicators: Notwithstanding the efforts by the management to improve the credit quality of the portfolio, CCFL witnessed a sharp increase in NPAs during FY2020, mainly due to the challenging macro outlook that prevailed during the period. The Gross NPA ratio increased to 9.9% in March 2020, from 6.5% in March 2019. However, the same has marginally improved to about 9.8% in June 2020, where the NBFI sector NPA ratio has increased to about 16% (from 11.1% in March 2020 and 7.7% in March 2019) during the same period. In terms of the asset classes, ICRA Lanka notes that the new slippages are across all the asset classes; however, a sharp increase in NPAs is witnessed in business/ SME related lending, such as term loans, auto loans, and commercial lorries category. A significant NPA increase (from about 1.4%in FY2019 to 6.1% in FY2020) in the 3W portfolio also has been recorded, and 3Ws account for about 28% of the entire loan portfolio. During FY2020, CCFL has written-off about LKR 2.7 Bn, compared to about LKR 4.7 Bn in FY2019. ICRA Lanka notes that the write-offs are primarily coming from the microfinance portfolio. The management’s ability to improve overall asset quality by controlling incremental slippages will be a key monitorable, going forward.
Stretched liquidity profile: The Company is largely dependent on deposits, which accounted for 73% of the total funding base as of March 2020, while the same has moderated from about 80% in FY2018 and FY2019. The ALM position of the Company has further widened to -14.7% (<1-year bucket) as of March 2020 vis a vis -13.4% as of March 2019. CCFL’s short term ALM mismatch has widened during the recent years, as the Company has cut-down on short term products such as microfinance and working capital finance to focus on leasing products, which are of longer tenures. ICRA Lanka notes that historically the deposits had seen a refinancing rate of ~75%, providing some comfort. Going forward, the management’s ability to improve the overall liquidity profile by diversifying the funding base with more long term funding sources will be critical from a rating point of view.
Analytical approach: 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 the Company:
CCFL, a registered finance company, offers leasing, hire purchase, business credit facilities, microfinance, factoring, term loans and other personal loans apart from accepting deposits (fixed and savings). The Company was established in 1982 as a specialized leasing company in Kandy. In October 2009, BG Investments (Pvt) Ltd. acquired the controlling stake of the Company. Since the change of ownership, the Company has rapidly expanded its service locations to about 118 from about 22 in FY2012. The Company has an employee base of about 2,800. CCFL’s shares were listed on the Dirisavi Board (secondary board) of the CSE in June 2011. The Company witnessed investments from the impact investor, Creation Investment Sri Lanka LLC in March 2014 and regional NBFI, Group Lease Holdings Pte Ltd in December 2016. As of March 2019, BG Investment (Pvt) Ltd held 50.25% of the shares, while Group Lease Holdings Pte Ltd. held 29.99%, Creation Investments owned about 8.67%. During FY2015, the Company acquired the majority stake in Trade Finance and Investments PLC, which presently is a 99.7% owned subsidiary.
During the financial year ended March 31, 2020, CCFL reported a net profit of LKR 1,664 Mn on a total asset base of LKR 80.3 Bn, compared to the net profit of LKR 2,078 Mn on a total asset base of LKR 80.1 Bn during the financial year ended March 31, 2019.
Hatton National Bank PLC
Hatton National Bank PLC (HNB) is one of the larger private sector commercial banks in the country with total assets amounting to LKR 1,146 Bn as at March 31, 2020. The Bank was incorporated in the present form in the year 1970. Stassen’s group with 17.8%, Sri Lanka Insurance Corporation Ltd, with 12.7% and Employee Provident Fund with a 9.8% stake, are the major shareholders of the Bank. During CY2019, HNB reported a PAT of LKR 14 Bn on a total asset base of LKR 1,125 Bn, compared to a PAT of LKR 15.5 Bn on a total asset base of LKR 1,086 Bn in CY2018. For the 3M ended March 31, 2020, the Bank reported a PAT of LKR 2.6 Bn on a total asset base of LKR 1,146 Bn. The Bank witnessed a slight moderation of NIM during CY2019, to about 4.45% from about 4.66% in CY2018. The same has further moderated to about 4.02% during the Q1CY2020. Overall profitability (PAT/ ATA) has also moderated during the period from about 1.52% in CY2018 to 1.27% in CY2019 and 0.93% in Q1CY2020. Gross NPA has witnessed a sharp increase during the same period, from about 2.78% in December 2018 to 5.91% in December 2019 and 5.90% in March 2020.
Sampath Bank PLC
Sampath Bank PLC is one of the larger private sector commercial banks in the country with total assets of LKR 983 Bn as at March 31, 2020. The Bank commenced operations as a licensed commercial bank in 1987 and was noted for introducing technology to the banking sector. Major institutional shareholders include Vallibal One PLC with a 14.95% and Employee Provident Fund with a 9.97% stake. The Sampath group companies include Sampath Centre Ltd (97.14%), SC Securities (Pvt) Ltd (100%), Siyapatha Finance PLC (100%) and Sampath Infsormation Technology Ltd (100%). During CY2019, Sampth Bank reported a PAT of LKR 11.2 Bn on a total asset base of LKR 962 Bn, compared to a PAT of LKR 12.1 Bn on a total asset base of LKR 914 Bn in CY2018. For the 3M ended March 31, 2020, the Bank reported a PAT of LKR 2.5 Bn on a total asset base of LKR 983 Bn. The Bank witnessed a marginal moderation of NIM during Q1CY2020 to about 4.10% from about 4.43% in CY2019. Overall profitability (PAT/ ATA) has also moderated during the period from about 1.42% in CY2018 to 1.19% in CY2019 and 1.03% in Q1CY2020. The gross nonperforming loans increased to 6.72% at the end of March 31, 2020, from 6.37% reported at the end of 2019.
Key financial indicators of CCFL
Rating history for the last three years:
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 The letters SO in parenthesis suffixed to a rating symbol stand for Structured Obligation. A SO rating is specific to the rated issue, its terms, and its structure. The SO ratings do not represent ICRA Lanka’s opinion on the general credit quality of the issuer(s) concerned
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