People’s Merchant Finance PLC

People’s Merchant Finance PLC; Ratings reaffirmed; Outlook revised to Stable

InstrumentPrevious     Rated Amount (LKR Mn)Current        Rated Amount (LKR Mn)Rating Action
Issuer RatingN/AN/A[SL]B reaffirmed; outlook revised to Stable from rating watch with developing implications

Rating action

ICRA Lanka Limited has reaffirmed the issuer rating of People’s Merchant Finance PLC (“PMF”/“the Company”) at [SL]B (Pronounced SL B); while revising the outlook to Stable from rating watch with developing implications.

Rationale

The rating factors in the recent capital infusion of LKR 812 Mn via a rights issue, which enabled the Company to meet the regulatory core capital requirement of LKR 2.0 Bn. As of March 2021, PMF reported a core capital of LKR 2.1 Bn, which puts the Company above the current minimum core capital requirement of LKR 2.0 Bn. However, ICRA Lanka notes that the Company needs to meet the upcoming capital hurdle of LKR 2.5Bn by December 2021. The rating continues to take note of the Company’s small scale of operations, the limited franchise and modest asset quality. The limitations on the Company’s funding diversity have been somewhat relaxed post the recently completed rights issue, as the Central Bank of Sri Lanka (CBSL) removed the borrowing cap of LKR 39 Mn and relaxed the deposit cap to LKR 3.5 Bn from LKR 2.5 Bn. ICRA Lanka would closely monitor the improvement in PMF’s capital structure to meet the next capital requirement, asset quality movement, and its overall financial performance going forward.

Outlook: Stable

The outlook may be revised to ‘Positive’ in case of a steady improvement in the Capital and earnings as portfolio expands, while keeping the asset quality under control. The outlook may be revised to ‘Negative’ in case of a significant weakening in the asset quality, profitability, liquidity, or capital profile. Any regulatory action on the Company, which could impact its business and financial performance, would also be a credit Negative.

Key rating drivers

Credit challenges

Small scale of operations and modest franchise; People’s Merchant Finance (“PMF”/“the Company”) is a small-scaled licensed finance company with LKR 4.7 Bn asset base and a loan portfolio of LKR 3 Bn as of March-21. PMF was incorporated in 1983 as an investment banking arm of Peoples Bank. Subsequently, the Company became a licensed finance company with Peoples Bank (“PB”) and its subsidiary Peoples Leasing and Finance PLC (“PLC”) being the main shareholders with 50.16% and 37.06% shareholding prior to May-19. Sterling Capital Investment (Pvt) Limited (SCI) infused a total of LKR 1.36 Bn (LKR 160 Mn through a private placement in March-19 and LKR 1.2 Bn through a rights issue in May-19) to become the main shareholder with a stake of 68.02% in May-19. Following a further infusion of capital through a rights issue in March-21, Sterling Capital Investment (Pvt) Ltd further increased its shareholding to 78.55% as it subscribed to LKR 790 Mn of the total LKR 812 Mn capital. PB and PLC continue to maintain minority stakes of 10.36% and 7.65% as in March-21 respectively. ICRA Lanka also notes the growth of the portfolio in FY2021 post the restructuring process. PMF reported a YoY growth of 67% in its gross portfolio in FY2021 and this was mainly through the safe asset classes such as gold loans and margin trading. The Company’s portfolio consists of leasing (51%), loans (20%), gold loans (16%), margin trading (13%) as of Mar-21. PMF operates through a branch network of 11 branches.

Improved asset quality levels, yet remain weaker than sector average; PMF reported a significantly high gross NPA ratio of 29.72% as on Mar-20 as compared to 11.66% as on Mar-19. This was mainly as a result of the portfolio moderation as the Company halted much of its disbursements in the FY2020 amidst the restructuring process. However, the Company has been able to improve its gross NPA ratios in FY2021 due to its continued effort on recoveries and quality of new credit generations. The absolute NPAs reduced by 20% from last year to LKR 490 Mn as of Mar-21, while the growth of the portfolio (around 70%) also contributed to the improvement of the gross NPA ratio to 13.87% as of Mar-21. However, the asset quality levels continued to remain below the sector average (11.32% as of March-21). ICRA Lanka also noted the high concentration level of the top 10 NPAs which accounted for 48% of the total NPAs as of Mar-21. The Company maintained a high provision coverage which stood at 84.21% as on Mar-21 as compared to the licensed finance sector average of 63.98% as on Mar-21. Management’s ability to control the new slippages, recover the legacy portfolio, and further improve the quality of the new credit originations would be crucial, going forward.

Limited funding diversification; The Company continues to face limitations on the ability to diversify its funding base due to the limited franchise and the small scale of operations. Furthermore, the regulatory cap of LKR 3.5 Bn on deposits also limits the funding profile of the Company. Following the recent capital infusion, the CBSL removed the LKR 39 Mn borrowing cap imposed earlier; and relaxed the deposit cap to LKR 3.5 Bn from LKR 2.5 Bn until the regulatory capital requirement of LKR 2.5 Bn by December 2021 is met. Further, following the capital infusions from May-19, the Company continued to report positive short-term (less than 1 year) ALM mismatches and reported 18.25% as of Mar-21 (22.57% as of Mar-20).

PMF meets the regulatory core capital requirement of LKR 2 Bn; however, is still short of the LKR 2.5 Bn regulatory core capital requirement to be met by December 2021; Over the past years, PMF has continued to operate below the minimum regulatory core capital requirement. In May-2019, Sterling Capital Investments (Pvt) Ltd infused LKR 1.36 Bn into the Company to gain the majority stake of the Company. Further capital infusion via a rights issue in CY2020 got delayed amidst the pandemic. Finally, in Mar-21, PMF concluded its rights issue where it raised LKR 812 Mn. Following the rights issue, the Company reported a core capital of LKR 2,124 Mn and is above the regulatory requirement of LKR 2,000 Mn. However, ICRA Lanka notes that PMF is still short of the next capital requirement of LKR 2,500 Mn to be met by Dec-21 and envisages its major shareholder, Sterling Capital to provide the required capital support. Given the modest portfolio size and the recent capital infusions, the Company continued to maintain high CAR ratios with a core and total capital adequacy ratio of 44.40% and 44.38% respectively as of Mar-21 vis-à-vis 37.05% and 37.02% as of Mar-20. (11.24% and 11.21% respectively as of Mar-19). The regulatory requirement for core and total CAR was 6.50% and 10.50% respectively as on Mar-21.

Weak earnings track record, while the same has improved in FY2021: PMF reported a profit before tax (PBT) of 67 Mn in FY2021, after more than 8 years of losses. This was mainly as a result of a reversal in the provision for loan losses and profits recorded from real estate sales and disposal of Property, Plant & Equipment (PPE). PMF reported a credit cost (Provisioning/ATA) of -2.07% for FY2021 vis-à-vis 2.94% in FY2020 and 0.96% in FY2019. The other income/ATA significantly improved to 1.61% in FY2021 vis-à-vis 0.37% in FY2020 and 0.44% in FY2019. However, the Company witnessed moderated Net Interest Margins (“NIM”) in FY2021 in comparison to FY2020, mainly due to lower asset yields during the period. NIM for FY2021 was reported at 5.48%, a moderation from 7.86% in FY2020 (6.52% in FY2019). The Company’s profitability in terms of Return on Assets (On PAT) improved significantly in FY2021, mainly as a result of the credit cost reversal and the increase in other income. The RoA (On PAT) for FY2021 was 1.59%, an improvement from -2.39% in FY2020 and -3.22% in FY2019 for PMF and this remained below the licensed finance sector ROA (On PAT) of 2.08% for FY2021, 0.82% for FY2020 and 1.45% for FY2019.

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:              

Peoples Merchant Finance was formerly known as Peoples Merchant Bank. The Company was incorporated in 1983 as the investment banking arm of Peoples Bank. Subsequently, the Company was registered under the finance business act and became a licenced finance company in 2012. Sterling Capital Investments (Pvt) Limited is the main shareholders with 78.55% shareholding as on Mar-21. The Company has 11 branches including one pawning centre.

During the year ended March 31, 2021, PMF reported a net profit of LKR 68 Mn on a total asset base of LKR 4,704 Mn as compared to a net loss of LKR 80 Mn on a total asset base of LKR 3,815 Mn in the previous fiscal year

Key financial indicators (Audited)

Amount in LKR MnFY2018FY2019FY2020FY2021
Net Interest Income92190264233
(Loss)/Profit after Tax(148)(94)(80)68
Net worth2161431,5532,131
Loans and Advances, Gross2,6522,8842,1353,570
Total Assets2,9282,8933,8154,704
Return on Equity(51.22)%(52.24)%(9.45%)3.68%
Return on Assets (On PAT)(4.64)%(3.22)%(2.39%)1.59%
Gross NPA9.83%11.66%29.72%13.87%
Net NPA3.28%(2.07)%13.00%2.19%
Capital Adequacy Ratio5.72%11.21%37.02%44.38%
Gearing (times)11.8618.661.361.08
Rating history for the last three years:
Analysts
Sachini Costa
+94-774781595
sachini.costa@icralanka.com


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