July 18, 2006 (LBO) – Sri Lanka’s Arpico Finance Co. Ltd has secured a BB2 rating for its long-term senior debt from Lanka Rating Agency. “Our rating reflects Arpico’s weak asset quality, delicate performance and marginal capitalisation,” the rating agency said Tuesday.
Arpico, a small finance company quoted on the Colombo Stock Exchange, has been crippled with weak underwriting practices, poor monitoring and recovery efforts.
As a result, its gross non-performing loans (NPLs) peaked at 131.16 million rupees in FYE 31 March 2003, recording a mammoth gross NPL ratio of 29.90 percent.
The ratio worsened to 32.01 percent in FY Mar 2004 due to slow loan growth, but eased to 22.23 percent with the upswing in lending activities during FY Mar 2005.
Nevertheless, this ratio remained worse than the industry average of 8.14 percent as at end-FY Mar 2005, the risk evaluator said.
However, Arpico had made adequate provisions, resulting in a gross NPL coverage of 93.03 percent as at the same date.
Arpico’s financial performance has traditionally lagged behind the industry.
After suffering losses in FY Mar 2003 due to massive loan loss provisions, the firm’s performance improved in FY Mar 2004 and FY Mar 2005.
Arpico recorded a return on assets of 3.68 percent and a return on equity of 34.85 percent as at end-FY Mar 2005, against the industry averages of 3.02 percent and 21.16 percent.
The improvement may be attributed to increased profits from its real-estate dealings and better recoveries.
“We note that the Company’s net interest income declined 10.44 percent despite its stronger loan growth. Thus the sustainability of Arpico’s overall profitability is yet to be demonstrated.”
Given its slow portfolio growth, liquidity has not been a major concern.
Over the past few years, Arpico has been able to maintain its statutory liquid asset ratio above the minimum requirement of 15.0 percent.
Similarly, Arpico’s loan-to-deposit ratio has also been comfortably below 100 percent.
Meanwhile, Arpico’s risk-weighted capital adequacy ratio stood at the minimum statutory requirement of 10 percent as at end-FY Mar 2005. Given its weak asset quality, Lanka Ratings says Arpico’s capital cushioning is moderate.