Fitch Ratings Lanka has affirmed Bimputh Finance PLC’s National Long-Term Rating at ‘BB(lka)’. The Outlook is Stable.
KEY RATING DRIVERS
Bimputh’s rating reflects its small franchise compared with higher-rated peers and high-risk appetite stemming from its microfinance-dominated loan portfolio, which Fitch sees as risky due to the segment’s greater susceptibility to economic cycles. Fitch’s assessment also captures likely pressure on Bimputh’s capitalisation from high loan growth, which is forecast by management’s guidance, and limited funding diversity due to a heavy reliance on borrowings.
Fitch believes aggressive loan growth would pressure Bimputh’s capitalisation in the absence of any meaningful capital infusions. The company’s Fitch Core Capital ratio remained flat at 16.5% as at end-March 2017 and Fitch believes Bimputh would depend on its 94% owner, Daya Group, for capital infusions.
Fitch expects microfinance to remain Bimputh’s dominant product exposure, notwithstanding that this exposure declined to 63% of total lending in the financial year ending March 2017 (FY17), from 82% at FYE16, due to increased exposure to non-microfinance loans supported by corporate and personal loans. A challenging operating environment, together with prolonged drought and several floods, reduced loan growth to 39% during FY17, from 118% in FY16.
Fitch expects Bimputh’s assets quality to remain under pressure. The reported six-month non-performing loan (NPL) ratio increased to 3.0% at end-March 2017, from 0.8% at end-March 2016, due to microfinance defaults. However, the company maintains adequate provisioning levels for these NPLs.
Fitch believes weaker net interest margins from its business-model shift to a lower share of microfinance and higher funding costs could weigh on Bimputh’s profitability and increase its credit costs. We expect Bimputh to continue relying on wholesale borrowings due to its weaker deposit franchise relative to peers. Deposits made up only 30% of its funding at end-March 2017 and are highly concentrated among the top-20 deposit holders.
Bimputh is a small finance company accounting for 0.95% of licensed finance company and specialised leasing company sector assets at end-March 2017 (March 2016: 0.86%).
Weaker capitalisation metrics may place downward pressure on the company’s ratings. Heightened risk appetite, indicated through aggressive loan growth or greater unprovided NPLs that increase capital impairment risks, could also lead to a downgrade of Bimputh’s ratings.
An upgrade is contingent on an improved franchise while sustaining credit metrics – in particular, capitalisation – similar to higher-rated peers, alongside a moderation of risk appetite.