Fitch assigns 'BB+(lka)' rating to Industrial Finance

Fitch Ratings Lanka said last week it had assigned a 'BB+(lka)' National Long-term rating to Industrial Finance Limited (IFL).

IFL is primarily focused on providing financing for commercial motor vehicles to small- and medium-sized enterprise clienteles mainly in the Western Province. IFL's rating reflects its good profitability, conservative credit policies, and good asset quality.

However, IFL's rating is constrained by its limited customer franchise, low product diversity and its relatively small size. These factors reduced its risk diversification and increased its overall market and credit risks, Fitch said.

The agency also noted that IFL's small equity base (Rs 81 million at FYE06) heightens its vulnerability to the possible erosion of capital from NPL accretion.

The Central Bank of Sri Lanka recently increased the minimum capital requirement for all registered finance companies to Rs 200 million in 2005.

This means that all RFCs have to increase their minimum initial capital to Rs 100 million by end January 2007 and finally to Rs 200 million by end July 2008. In order to comply with this requirement, IFL's management has indicated that they are considering a rights issue in late-2006 and a private placement thereafter.

IFL's lending portfolio was Rs 421 million at FYE06, placing it amongst the smaller players in the sector.

At FYE06, finance leases and hire purchase agreements accounted for 55% and 38% of the portfolio, respectively, while loans accounted for the balance. In FY06, asset growth was 46% yoy, albeit from a small base. IFL's low NPLs/Gross Loans of 5.7% at FYE06 (7.8% at FYE05) demonstrates that its asset quality was better than its peers in the sector and reflected its stringent credit policies.

IFL's overall profitability was robust, with the company enjoying reasonably comfortable net interest margin of 11.9% in FY06 compared to 11.2% in FY05, coupled with its relatively low cost structures (43.4% cost/income in FY06). Established in 1962, IFLis a registered finance company currently regulated by the CBSL. Over 68% of IFL's voting shares are owned by the Tudawe and de Costa families, who have interests in construction, apparel manufacturing and hospitals.