Fitch revises Sinhaputhra Finance outlook

Fitch Ratings Lanka has revised Sinhaputhra Finance PLC's (SFL) outlook to stable from negative. Its Long-Term rating has been affirmed at 'B(lka)'.

The outlook revision and affirmation reflect improvements in SFL's credit risk management practices and the subsequent stabilisation and enhancement in its asset quality, although the latter still remains weaker than its peers' average. The affirmation also reflects SFL's weak net non-performing loans (NPLs)/equity ratio and low profitability relative to peers in its rating category.

The rating may be downgraded if SFL fails to prevent its asset quality and net NPLs/equity from weakening. The negative rating action may also result from ddeterioration in adjusted equity/assets ratio (excluding revaluation gains) that will reduce SFL's capacity to negotiate a potential increase in credit costs as its loans season.

SFL's clientele are largely limited to the Kandy district (Central province) and its surrounding areas, and consist of the small and medium enterprise sector. Vehicle finance via leases and hire purchase agreements accounted for half of the loan portfolio at end-March 2012 (FYE12), with the remainder consisting of loans (majority backed by personal guarantees and property mortgages), which has been the case over the last five years.

Incremental portfolio loan growth was 22 percent in FYE12 (19 percent in FYE11). Structural changes in the recovery/collection process have begun to take effect with SFL's advances in arrears over six months (regulatory NPLs) declining to 8.8 percent at FYE12 from 16.2 percent at FYE11. However, asset quality ratios still lag the sector average.

Although net interest margins (NIM)s has steadily increased to 7.9 percent in FY12 from 5.5 percent in FY10, these ratios are on the lower end of the sector.

Liquidity tightened due to the strong loan growth, however SFL's statutory liquidity ratios remained above the regulatory norms. SFL like other registered finance companies (RFCs) face interest rate risks on account of the structure of its assets and liabilities. Rate-sensitive assets covered 59 percent of rate-sensitive liabilities at FYE12, which, given its low NIMs and low adjusted capitalisation, provides less flexibility to manage short-term interest rate hikes and higher-than-expected credit costs.