Financial Times - LRA assigns weak rating to Arpico Finance

Lanka Rating Agency (LRA) has assigned a long-term financial institution rating of BB2 (with a stable outlook) and a short-term rating of NP to Arpico Finance Company Limited.

“Our rating reflects Arpico’s weak asset quality, delicate performance and marginal capitalization,” LRA said.

Before 2003, Arpico had been crippled by weak underwriting practices and inadequate monitoring mechanisms, exacerbated by poor recovery efforts. As a result, its gross non-performing loans (NPLs) peaked at Rs 131.16 million in FYE 31 March 2003, recording a mammoth gross NPL ratio of 29.90%. The ratio worsened to 32.01% in FY Mar 2004 due to slow loan growth, but eased to 22.23% with the upswing in lending activities during FY March 2005. Nevertheless, this ratio remained worse than the industry average of 8.14% as at end-FY March 2005. On a more positive note, the Company had made adequate provisions, resulting in a gross NPL coverage of 93.03% as at the same date, LRA said.

Arpico’s financial performance has traditionally lagged behind the industry. After suffering losses in FY March 2003 due to massive loan loss provisions, the company’s performance improved in FY March 2004 and FY March 2005. Arpico recorded a return on assets of 3.68% and a return on equity of 34.85% as at end-FY March 2005, against the industry averages of 3.02% and 21.16%.

“Given its slow portfolio growth, liquidity has not been a major concern. Over the past few years, the company has been able to maintain its statutory liquid asset ratio above the minimum requirement of 15%. Similarly, Arpico’s loan-to-deposit ratio has also been comfortably below 100%,” LRA said.