Fitch affirms Merchant Credit of Sri Lanka at 'BBB(lka)'
Fitch Ratings Lanka has affirmed Merchant Credit of Sri Lanka Ltd's
(MCSL) National Long-Term rating at 'BBB(lka)'. The rating has been
removed from Rating Watch Evolving (RWE) and assigned a Stable Outlook.
The rating has been uplifted based on Fitch's expectations of support
from MCSL's parent, the state-owned Bank of Ceylon (BoC;
'AA+(lka)'/Stable).
BoC has an effective shareholding of 86 percent in MCSL and is
represented on the latter's board. The removal of the RWE, which was
placed on May 27, 2011,follows Merchant Bank of Sri Lanka Plc's (MBSL)
March 15, 2012 announcement that it would not proceed with its proposed
merger with MCSL and another entity of the BoC group.
Fitch views MCSL's stand-alone financial profile to be weak. Its core
business of vehicle finance, in the form of finance leases and hire
purchase (HP), comprised 37 percent and 29 percent of its loan book at
end-2011, with the balance comprising loans.
Due to slippages of some large facilities into non-performing loan
(NPL) category, MCSL's gross NPL ratio (three-month NPLs/gross loans)
increased to 19.1 percent at end-2011 (financial year ending Dec) from
16.8 percent at the end- of 2010.
The agency notes that MCSL has made an effort to reduce average loan
size and thereby concentrations in loans.
Profitability in terms of pre-tax return on assets (adjusted for
income of equity investments) decreased slightly to 3.1 percent in 2011
from 3.4 percent in 2010, due to an increase in operating expenses.
Fitch expects MCSL's profitability to come under pressure as its net
interest margins (NIMs: 9.4 percent in end-2011, 9.5 percent in
end-2010) tighten alongside an increase in its funding costs.
Capitalisation in terms of equity/ assets also remained low at 9.9
percent at end-2011.
The agency expects the company's capitalisation to be strengthened
when it becomes listed on the Colombo Stock Exchange - a regulatory
requirement for all registered finance companies (RFCs).
Funding is predominantly through deposits. Although a strong loan
expansion of 37 percent in 2011 resulted in an increase in borrowings,
MCSL's deposit concentrations remain high with its top five deposits
accounting for 26 percentof total deposits at FYE11.
Also, unutilised credit lines were not sufficient to cover 36 percent
of risk-sensitive assets and liabilities under 12 months maturity at
end-December 2011.
Fitch expects that liquidity support would be forthcoming from BoC if
deemed necessary.
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