Fitch downgrades Lanka's Sinhaputhra

Fitch Ratings Lanka said this week it has downgraded the National Long-term rating of Sinhaputhra Finance Limited (SFL) to 'BB-(lka)' (BB minus(lka)) from 'BB(lka)', with the outlook being ‘Negative’.

The downgrade reflects the significantly weakened asset quality and solvency at the regulatory six-month level. The rating also factors in the company's somewhat low capital position and the substantial deterioration in profitability in the six-month period ending September 2007 (H108). “The Negative Outlook is indicative of the need for SFL to reverse the trend of weakening collections and declining profitability,” Fitch said.

Although loan growth was 28% in FY07 (marginally above the sector growth rate of 26% at FYE07), the portfolio remained more or less stagnant in the six-month period to H108 as the company's primary focus was on recoveries.

Fitch notes that the improved and robust management information systems which would be fully implemented by mid-2008, could aid this process. Approximately half the loan portfolio consisted of leases for the financing of second-hand commercial vehicles, where a significant proportion is also secured by property mortgages.

The majority of the remainder of the portfolio is made up of working capital loans, where, again, the bulk is pledged against property mortgages. The agency notes that such collateral offers some comfort in the event of default.

SFL's clientele consists of the small-and-medium-enterprise sector, and geographical coverage is to a large extent limited to the Central Province of Sri Lanka where it enjoys a degree of brand franchise and recognition, Fitch said The adverse economic environment resulted in a deterioration in SFL's asset quality at H108. The gross NPL ratio (Fitch defines NPLs as loans in arrears of over three months) was 33.6% at H108, compared to 11.7% for the sector at FYE07, a function of thecompany's less stringent credit monitoring and follow-up procedures in the past. The company raised Rs million via a preference share issue in mid-February 2008 but Fitch notes that further equity injections are likely to be required to achieve any significant improvements to solvency.