ICRA Lanka revises the rating outlook of Commercial Credit and Finance PLC
|Instrument||Rated Amount (LKR Mn)||Rating Action|
|Issuer rating||N/A||[SL]BBB reaffirmed; Outlook revised to “Stable” from “Negative”|
|Guaranteed Redeemable Debentures Programme||2,000||[SL]AA(CE) with Stable outlook; outstanding|
|Commercial Paper Programme||1,000||[SL]A3; outstanding|
ICRA Lanka has reaffirmed the issuer rating of Commercial Credit and Finance PLC (“CCFL”/ “The Company”) at [SL]BBB (pronounced as S L Triple B) while revising the outlook to Stable from Negative. ICRA Lanka has an outstanding rating of [SL]AA (CE) (pronounced as S L double A credit enhancement) with a Stable outlook for the LKR 2,000 Million Guaranteed Senior Redeemable Debenture programme of the company and also an outstanding short-term rating of [SL]A3 for the Company’s LKR 1,000 million Commercial Paper Programme.
The outlook revision factors in the improved asset quality indicators and the increase in the asset-backed exposure of the portfolio. CCFL’s gross NPA ratio improved to 9.14% as on Dec-20 from the post covid gross NPA ratios of 9.92% as on Mar-20 and 9.28% as on Sep-20. ICRA Lanka notes that, the GNPA ratio has further improved to about 6% by Mar-21, following higher recovery levels and NPA write-offs during the last quarter of FY2021. The rating also takes comfort from the increase in asset backed portfolio over the last 3 years; about 93%of the portfolio was asset-backed as on Dec-20, compared to 68% asset-backed exposure as on Mar-18. Furthermore, the rating continues to factor in CCFL’s established business presence in Sri Lanka, the experienced Senior Management team and the adequate capital structure.
ICRA Lanka takes cognisance of the risk profile of the company as it is exposed to customer segments with modest credit profiles who are highly vulnerable to economic cycles. Going forward, CCFL expects to focus on 3W and 2W leasing together with gold loans while curtailing Micro Finance and other unsecured lending. CCFL’s ability to maintain healthy asset quality indicators would be a key monitorable.
The outlook revision to “Stable” from “Negative” reflects the improvement of the asset quality indicators of the Company. The outlook revision also factors in the increase in exposure to asset-backed lending. The outlook may be revised to “Negative in case of deterioration in the Company’s asset quality levels, weakening profitability. The outlook may be revised to “Positive” in case of an improvement in the Capitalization and asset quality indicators of the Company.
Key rating drivers
Established franchise and experienced senior management team: CCFL has 126 branches across the island. It is one of the largest non-banking financial institutions in Sri Lanka with an asset base of LKR 78 Bn as on Dec-20. CCFL’s net lending portfolio stood at LKR 60 Bn as in Dec-20 (LKR 62 Bn in Mar-20 and LKR 61 Bn in Mar-19) with a composition of 69% in leasing, 13% in loans, 13% in gold loans and 4% in microfinance. CCFL’s current focus is on 2W, 3W leasing and gold loans which collectively accounted for 70% of the portfolio as on Dec-20. Furthermore, the promoter/CEO and the senior management team are experienced professionals in the financing business.
Improved asset quality indicators: CCFL’s gross NPA ratio significantly improved to about 6% as on Mar-21 from 9.92% as on Mar-20 and 9.14% as on Dec-20. The improved gross NPA ratio is on account of the management’s focussed effort in collection and recoveries together with write offs during the last quarter of FY2021. CCFL wrote off about LKR 1.5 Bn in Q4FY2021 mainly from the micro-finance and unsecured lending portfolios. The collection levels remained high over the past few months with Dec-20 reporting a collection efficiency  of 94%. The overall delinquencies in the 90+ days past due (dpd) stood high at 17.07% as on Dec-20 but has improved from 20.60% as on Mar-20.
Increase in exposure of asset-backed lending: CCFL’s portfolio has shifted over the past years and comprised of a portfolio with 93% asset-backed lending as on Dec-20 from 68% as on Mar-18. CCFL had a portfolio exposure of ~18% in Micro-Finance as in Mar-18 which has reduced to just LKR 3 Bn, representing 4% of the total portfolio as on Dec-20. The company has curtailed its growth in lending products of the SME segment, such as working capital finance amidst the adverse impacts faced by the segment following the continuous macro-challenges since CY2017. Going forward, CCFL will focus on 3W, 2W leasing and gold loans and these 3 products collectively accounted for 70% of the portfolio as on Dec-20. Notwithstanding the increase in asset backed exposures, ICRA Lanka takes cognisance of the relatively higher risk profile of the portfolio as the company largely serves a clientele with moderate economic means.
Healthy Capitalization Profile: As on Dec-20, CCFL reported a core capital of LKR 13,933 Mn against a regulatory requirement of LKR 2,000 Mn. In terms of risk-weighted capital adequacy ratios, the core capital and the total capital ratio stood at 13.14% and 13.31% as on Dec-20 (14.14% and 14.95% respectively as on Mar-20) as compared with the regulatory requirement of 6.50% and 10.50%. Going forward, it will be important for the company to maintain a healthy capitalization profile as it intends to grow its 3W, 2W and gold loan portfolios.
Improved profitability but margins likely to remain moderated due to increase in asset-backed lending: The Net Interest Margin (“NIM”) has moderated over the period as a result of the portfolio’s shift away from the high yielding unsecured products such as microfinance and SME lending, towards more secured lending product categories including leasing and gold loans. Combined with the sharp decline in the systemic interest rates and the debt moratorium, CCFL’s NIM moderated to an annualised 10.93% in Dec-20 vis-à-vis 12.93% in Mar-20 and 14.61% in Mar-19. The credit cost (Provisioning/ATA) slightly increased to an annualised 2.81% in Dec-20 from 2.75% in FY20 (2.79% in FY19). Provisioning in absolute terms amounted to LKR 2.2 Bn in FY20 vis-à-vis LKR 2.3 Bn in FY19; provisioning for the 9MFY21 amounted to LKR 1.7 Bn. On account of the reduction in the employee expenses and other operating expenses, the operating expenses/ATA moderated to an annualised 7.03% in Dec-20 vis-à-vis 8.45% in FY20 and 9.02% in FY19. Overall, the profitability in terms of ROA (On PBT) improved to an annualised 2.96% in Dec-20 vis-à-vis 2.24% in FY20. Going forward, it will be crucial for the company to manage its credit costs and operating expenses, as the room for core lending margin expansion will be limited.
High dependence in public deposits: CCFL’s total borrowings amounted to LKR 61 Bn as on Dec-20 and was largely characterised by public deposits, which accounted for 73% of total debt as on Dec-20. However, this has moderated from 75% as on Mar-20 and 81% as on Mar-19. This is due to the company increasingly resorting to securitized borrowings, against its leasing portfolios. Despite the higher dependence on public deposits, relative granular nature of the deposit base and healthy renewal rates provide some comfort from a liquidity 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 126 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 December 2020, 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, and subsequently on 31st December 2020, Trade Finance and Investments PLC was amalgamated with CCFL.
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 80,360 Mn, compared to the net profit of LKR 2,079 Mn on a total asset base of LKR 80,111 Mn during the financial year ended March 31, 2019. For the 9M ended December 31, 2020, CCFL reported a net profit of LKR 1,000 Mn on a total asset base of LKR 78,406 Mn.
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 1,292 Bn as at December 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 13.4% and Employees Provident Fund with 9.8% stake, are the major shareholders of the Bank. During CY2020, HNB reported a PAT of LKR 11 Bn on a total asset base of LKR 1,292 Bn, compared to a PAT of LKR 14 Bn on a total asset base of LKR 1,125 Bn in CY2019. The Bank witnessed a moderation of NIM during CY2020, to about 3.70% from about 4.45% in CY2019 and 4.66% in CY2018. Overall profitability has also moderated during the period with ROA (PAT/ATA) declining from about 1.52% in CY2018 to 1.27% in CY2019 and 0.95% in CY2020. HNB reported a gross NPA of 4.31% as on Dec-20 in comparison to 5.91% as on Dec-19 and 2.78% as on Dec-18.
Key financial indicators of CCFL
|Net Interest Income||10,835||10,856||9,373||6,506|
|Profit after Tax||2,351||2,079||1,664||1,000|
|Reported net worth||12,263||11,987||13,317||14,317|
|Loans and Advances||66,905||60,855||61,615||60,172|
|Return on Equity||20.9%||17.1%||13.2%||9.7%|
|Return on Assets||2.8%||2.5%||2.1%||1.7%|
|Gross NPA ratio||7.0%||6.5%||9.9%||9.1%|
|Net NPA ratio (based on IFRS provisioning)||1.6%||-0.4%||2.5%||-0.2%|
|Adjusted Gearing (times)||5.4||5.5||4.9||4.3|
Rating history for the last three years:
|Sachini Costa |
 Collection efficiency= Total collections/ collections due
 Return on Assets: PAT/ Average Total Assets
 Gearing adjusted for revaluation reserves and deferred tax assets
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