Fitch affirms 'BBB(lka)' National Rating of The Finance Company

Fitch Ratings Lanka has affirmed the 'BBB(lka)' National Long-term rating assigned to The Finance Company PLC (TFC).

At the same time, the agency has affirmed the 'BBB-(lka)' (BBB minus(lka)) rating of TFC's subordinated debentures and said the outlook is Stable.

TFC's rating factors in its significant market share in the finance company sector, as well as comfort derived from its main shareholder - The Ceylinco Consolidated Group (CCG).

The rating is constrained by TFC's low capitalisation, weak asset quality, and the risks inherent to the finance company sector, Fitch said in a press release.

TFC is the largest finance company in Sri Lanka with a 27% share of sector assets at end-2006. TFC's portfolio grew by 28% in FY07 (FY06:18%). Vehicle financing (leasing and hire purchase) and real estate (housing loans, housing projects, and land sales) accounted for 55% and 40%, respectively, of its portfolio at FYE07 (59% and 37%, respectively, at FYE06).

The rest of the portfolio was accounted by loans. Net interest margins (NIM), when adjusted for TFC's real estate business, was better than the peer average (adjusted NIM was 11.7% in FY07, 10.7% at FY06). Given that TFC's cost structure was high (cost/income ratio was 59% in FY07 and 60% in FY06), TFC's ROAs were lower than its peer group - 2.7% in FY07 and 2.6% in FY06; peer group ROA was 3.6% in FY07.

Due to the high interest rate environment and the dampening domestic economic activity, TFC, as with other financial institutions, saw its asset quality weakening.

At H108, overall NPLs/loans was 16.8%, from 17.1% at FYE07, and 14.1% at FYE06 (Fitch Ratings defines NPLs as loans in arrears for over three months).

Given 36% of NPLs were backed by real estate - NPL provisioning cover was low at 8.7% at H108 (7.0% at FYE07).