Nation Lanka Finance PLC

ICRA Lanka revises the issuer rating of Nation Lanka Finance PLC

InstrumentRated Amount (LKR Mn)Rating Action
Issuer RatingN/ARevised to [SL]C from [SL]C+; the rating continues to remain under watch with developing implications

Rating action                                                                        

ICRA Lanka Limited has revised the issuer rating of Nation Lanka Finance PLC (NLF or the Company) to [SL]C (pronounced S L C) from [SL]C+ (pronounced S L C plus). The rating continues to be placed on rating watch with developing implications.

Rationale

The rating revision factors in NLF’s weak capital profile which continues to be below the regulatory requirement, deteriorating asset quality and weak earnings profile. The Company’s TNW was about LKR 760 Mn as of Sep-21, below the regulatory minimum capital requirement of LKR 2.5 Bn effective from Jan-22, as a result of weak profitability and the delay in raising fresh equity capital. The failure to meet the regulatory capital had led to the imposition of deposit and lending caps by the CBSL. These have constrained NLF’s funding profile and operational flexibility. ICRA Lanka notes that, sizeable external capital infusion (in relation to the current net worth) would be required, as internal generation is likely to remain restrained. Management has further indicated a direct capital infusion as an alternative to the derailed merger plans with another non-banking financial institution (NBFI) to meet the regulatory capital requirements. 

ICRA Lanka also takes note of NLF’s deteriorating asset quality profile with high gross NPA ratios of 39.97% as in Sep-21 and 40.53% as in Jun-21 (36.56% as in Mar-21) as compared to NBFI sector’s average of 12.66% and 12.99% (11.31%) respectively for the same period. Higher NPA ratios were as a result of the declining loan portfolio and higher slippages within the business and micro finance loans due to the challenging macro conditions that prevailed. The rating continues to factor in NLF’s small scale of operations (net portfolio at LKR 5.44 Bn as of Sep-21) and its weak profitability indicators. Going forward, the Company’s ability to raise adequate capital on a timely basis and meet the minimum regulatory capital requirement and improve its asset quality would be crucial, from a rating perspective.

The rating continues to remain under watch with developing implications due to the announcement made by NLF that Sinha Capital Investment Limited will be infusing capital through a private placement and the conversion of the existing unlisted debentures of NLF to shares of the company through a private placement. This is following the derailment of the proposed amalgamation of NLF with Sinhaputhra Finance PLC (SIN); on 5th January 2022, it was announced that the LOLC Group Company, Commercial Leasing & Finance PLC (CLC) has obtained the regulatory approval to fully acquire, SIN.

Key rating drivers

Credit challenges

Minimum capital requirements and capital ratios continue to remain below regulatory requirements; NLF continues to non-comply with the regulatory minimum core capital requirement and capital adequacy requirements set by the CBSL with the company reporting a TNW of LKR 760 Mn as at Sep-21 in comparison to the regulatory requirement of LKR 2,500 Mn. The company’s Tier I capital ratio of 1.16% in Sep-21 (3.87% in Mar-21) remains significantly below the regulatory minimum of 7.00% (6.50% as in Mar-21). The company’s total capital ratio of 3.82% in Sep-21 (6.06% in Mar-21) also remains significantly below the regulatory requirement of 10.50%. Management is considering a direct capital infusion of around LKR 1,500 Mn by Sinha Capital Investment Limited along with the conversion of the existing unlisted debentures of NLF to shares of the company through a private placement of around LKR 150 Mn to meet the regulatory capital requirements. ICRA Lanka will closely monitor the progress and timeliness of the capital raising plans.

Modest loan portfolio capped with regulatory restrictions; NLF reported a modest net portfolio of LKR 5.4 Bn as of Sep-21, with exposures towards loans[1] (47%), micro finance (18%), leasing (11%), pawning (6%), hire purchase (5%) and a substantial legal stock (13%). The portfolio growth has been subdued (Q-o-Q growth rate of 0.41% in Sep-21 in comparison to the Q-o-Q degrowth rate of 1.97% in Jun-21) during the period due to the challenging macro conditions that prevailed during the period and due to the restrictions imposed by the CBSL on portfolio growth. CBSL has directed NLF to reduce the loan portfolio by LKR 50 Mn per month from Sep-19. ICRA Lanka notes that NLF has increased the disbursement of gold loans during the recent quarters, while curtailing unsecured products such as micro finance and business loans, due to the poor asset quality.

Further weakening of asset quality indicators; The Company reported a gross NPA ratio of 39.97% as of Sep-21 as compared to 40.53% as of Jun-21 and 36.56% as of Mar-21 which remains higher than the gross NPA ratio of the NBFI sector at 12.66% as of Sep-21 and 11.31% as of Mar-21. Higher slippages were witnessed on business and microfinance loans (which the company has currently curtailed) with the degrowth of the lending portfolio contributing to the high NPA ratios. Delinquency levels within the 90+ days bucket also rose significantly since the start of the pandemic in Mar-20 with sharp rises noted within the 1QFY2022 with fresh lockdowns being imposed. Going forward, it will be crucial for the company to control incremental slippages and improve overall asset quality indicators.  

Weak earnings profile; NLF’s net margins moderated further to 2.89% in the 1HFY2022 from 6.24% in Mar-21 and 10.59% in Mar-20 due to a sharper fall in asset yields as opposed to cost of funds. This has resulted in the overall profitability of NLF declining further with NLF reporting a net loss of LKR 198 Mn in the 1HFY2022 as compared to a net loss of LKR 124 Mn in FY2021 and a profit after tax of LKR 9 Mn in FY2020. With the overall decline in profitability, NLF recorded a decline in its ROA to -5.52% in the 1HFY2022 from -1.55% in FY2021 and 0.10% in FY2020. The company also reported a negative ROE of 46.16% for the 1HFY2022 and 12.24% for FY2021 in comparison to a positive ROE of 0.80% in FY2020. The Company’s ability to improve core margins and control operating expenses and credit costs will provide comfort on the earnings profile.

Stretched liquidity and funding profile; NLF reported a negative cumulative asset and liability mismatch (less than 1 year) of 13.83% in Sep-21 as compared to negative cumulative mismatch of 8.82% in Mar-21 due to the increase in short term borrowings and deposits of short term nature. Short term funding lines of the company have gradually increased with the moderation in deposits due to the LKR 7.3 Bn deposit cap. The funding profile continues to remain concentrated on deposits and accounted for 83% of the total borrowings as in Sep-21. ICRA Lanka expects the funding and liquidity profile of NLF to remain constrained until the company meets its regulatory capital requirements. 

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:

Nation Lanka Finance PLC (NLF) formally known as Ceylinco Finance PLC is a public limited company incorporated in Sri Lanka on 15th July 1987. The Company operates as a licenced finance company registered under Finance Business Act for the past 30 years.  NHL’s main shareholders are Mr. V Ramanan (55.52%) and Mr. U.H Dharmadasa (17.42%) and Mr. H.K.J Dharmadasa (6.47%) as in Sep-21, representing the Nawaloka Group.

During the year ended March 31, 2021, NLF reported a Loss After Tax of LKR 124 Mn on a total asset base of LKR 7,263 Mn as compared to a Profit After Tax of LKR 9 Mn on a total asset base of LKR 8,738 Mn in the previous fiscal year. For the six months ended September 2021, the Company reported a net loss of LKR 198 Mn on a total asset base of LKR 7,105 Mn compared to net profit of LKR 1.25 Mn on a total asset base of LKR 8,109 Mn in the six months ended September 2019. 

Key financial indicators
Amount in LKR MnFY2019FY2020FY2021Q1FY2022*
Net Interest Income1,262908 426 93
Profit after Tax1679 (124) (198)
Net worth1,1811,171 1,054 856
Loans and Advances6,5065,949 4,409 4,432
Total Assets8,9758,738 7,263 7,105
Return on Equity18.96%0.80%(12.24%)(46.16%)
Return on Assets1.85%0.10%(1.55%)(5.52%)
Gross NPA12.94%30.73%36.56%39.97%
Net NPA0.87%7.62%7.77%8.33%
Capital Adequacy Ratio7.97%7.36%6.06%3.82%
Gearing adjusted to revaluation (times)6.456.27 5.75 7.20

*Unaudited

Rating history for last three years:

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

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

[1] Includes business loans, property loans, fixed deposit backed loans and personal loans 


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