Central Finance asset quality seen weakening

A weakening of the Sri Lankan economy could see Central Finance Company’s (CF’s) asset quality deteriorating in the current financial year. “However because of CF's well developed credit risk management framework, it is expected that the asset quality will continue to compare favourably against the sector,” a top rating agency said.

Fitch Ratings Lanka made the comments while affirming, in an announcement, CF’s National Long-term rating at 'A+ (lka)'. The outlook on the rating is stable. CF's rating factors in its strong financial profile and its dominant market position as the second-largest registered finance company (RFC) accounting for 23% of sector assets at end-March 2007 (FYE07). The rating is constrained by its lack of product an funding diversity compared to commercial banks - inherent features of the RFC business model.

The company has been successful in creating a strong brand franchise over its 50 year operating history, and in capturing a large customer base through its 42 branches. Although loan growth slowed to 29% in FY07 (FYE06:43%), it was higher than sector growth of 26% in FY07. CF's portfolio is dominated by vehicle finance to the higher end of the subprime market, and at FYE07, leases and hire purchase agreements (HP) accounted for 72% and 20% of the company's loan portfolio, respectively. CF is also currently the market leader in the provision of operating leases, which accounted for 10% of CF's assets at FYE07. As the clientele in this segment comprises of large corporates, credit risk is this product is minimised.

Return on assets declined to 4.2% at FYE07 from 4.9% at FYE06, due to an increase in funding costs, coupled with a rise in operational expenses, a decline in the contribution of operating lease income, and higher effective taxation. However, profitability compared favourably against the sector ROA of 3.6% at FYE07, Fitch said. Increased recovery efforts, together with more stringent credit appraisals, resulted in an improvement in the gross NPL/gross loans ratio (Fitch defines NPLs as loans in arrears of over 3 months) to 6.9% at FYE07 from 8.7% at FYE06. This compares well against the sector average of 11.7% at FYE07, the rating agency said.

Although the bulk of CF's assets are financed by customer deposits, growth has been increasingly funded by bank borrowings (with its share increasing to 21% of the funding mix at FYE07 from 7% at FYE05). Interest rate swap agreements amounting to Rs 2.6 billion at FYE07 has enabled the company to minimise market risk.

“Historically sound profitability coupled with high earnings retention enabled CF to maintain a strong capital position. This, together with the revaluation of land and building, further boosted CF's capital, raising the equity/ assets ratio to 19.0% at FYE07 from 17.0% at FYE06 (sector average, excluding CF, 14% at FYE07). An increased equity base, and controlled NPL accretion resulted in solvency as measured by net NPL/equity to improve to 11.9% at FYE07 from 14.2% at FYE06, which compares well against the sector average of 42.9% at FYE07,” the statement said.

CF was established as a private company in 1957 by the Wijenaike family and was subsequently listed on the Colombo stock Exchange in 1969. At present, 22.39% of shares are held by the Employers Share Option Plan and 20.48% by the Wijenaike family. CF has a 20% interest in Nations Trust Bank together with interests in other associate and subsidiary companies.