Fitch affirms Central Finance rating with ‘stable’ outlook

Fitch Ratings Lanka has affirmed the 'A+(lka)' national long-term rating of Central Finance Company Limited (CF), the Kandy-based finance company with the outlook on the rating being stable also saying it’s the second largest finance company in Sri Lanka.

CF's rating takes into account its strong financial performance and its dominant market position in the finance industry accounting for 24.6% of sector assets at March 2006. CF has a strong capital base and its profitability is amongst the best in the industry. The rating is constrained by the limitations of RFCs' business model against the greater size and product/funding diversity of commercial banks, Fitch said.

“CF's large customer franchise captured through its 35 branches spread across the island enabled it to grow its loan book by 39.3% in FY06. CF's portfolio is dominated by vehicle financing to the sub-prime market segment, with leases and hire purchase agreements (HP) accounting for 63.8% and 14.4% of the portfolio respectively in FYE06. CF is also the market leader in the provision of operating leases to relatively more creditworthy corporate customers. It has also commenced on a condominium project via a fully owned subsidiary, targeting the middle income market.

However, real estate investment is to be undertaken on a selective basis and the company does not expect it to constitute a large share of its portfolio in the near term.

Going forward, CF's main focus would continue to be to provide vehicle financing facilities, Fitch added. CF's asset quality was satisfactory. Gross non-performing loans (defined by Fitch as loans in arrears for over three months) / gross loans was 7.2% in FYE06 (7.5% in FYE05), and favourable in comparison to peers due to prudent credit procedures and adequate internal controls. Although loan loss provisions / average loans declined from 1.8% in FYE05 to 0.2% in FYE06, Fitch feels that CF's provisioning is adequate given a loan loss reserves/NPL ratio of 60.1% in FYE06. CF's profitability was healthy with a return on assets of 4.9% in FYE06. This was driven by a favourable cost to income ratio of 39% in FYE06 (RFC sector average 49% in FYE06) and in spite of the company providing for deferred taxation as per Sri Lanka Accounting Standards 14 ahead of its requirement of FY07.

The company was established as a private company in 1957 by the Wijenaike family and was subsequently converted to a quoted company in 1969. At present 22.8% of shares are held by the Employers Share Option Plan and 21.4% by the Wijenaike family. CF has a 20% interest in NTB.