"However, a negative factor for SFC's credit profile is its elevated financial risk, as reflected in a reduction in its capitalisation during the financial year to end-March 2012 (FY12) compared with historical norms.
"This is due to the absence of capital injections to support SFC's high asset growth in FY12.
Fitch Affirms Senkadagala Finance at 'BBB+(lka)'
Fitch Ratings-Colombo/Taipei/Mumbai-13 November 2012: Fitch Ratings Lanka has affirmed Sri Lanka's Senkadagala Finance PLC's (SFC) National Long-Term Rating at 'BBB+(lka)' with a Stable outlook. The agency has simultaneously affirmed the rating on SFC's outstanding senior unsecured redeemable debentures of LKR300m at 'BBB+(lka)'.
SFC's rating reflects its long operating history and good credit profile which has been maintained through economic cycles, supported by sound credit controls, low refinancing risk and high profitability.However, a negative factor for SFC's credit profile is its elevated financial risk, as reflected in a reduction in its capitalisation during the financial year to end-March 2012 (FY12) compared with historical norms. This is due to the absence of capital injections to support SFC's high asset growth in FY12.
An upgrade of SFC's rating is contingent upon the company strengthening its franchise and improving its capitalisation to levels commensurate with asset growth, while maintaining strong asset quality and reasonable profitability. A continued weakening in SFC's capitalisation and/or financial flexibility (indicated by a further reduction of unencumbered assets relative to unsecured liabilities) over the next 12 months could lead to a downgrade.
Fitch believes SFC is likely to maintain its asset quality in line with peers despite a slower economic environment in the next 12-18 months, supported by its prudent underwriting policies and concerted recovery efforts. Asset quality improved during FY12 on the back of high loan growth (64% in FY12) and a 16.5% reduction in the value of outstanding NPAs, amid a more conducive economic environment. However a slowing macroeconomic environment in H1FY13 has led to a 49% increase in advances in arrears between three and six months. This increase is in line with peers and reflects cyclicality rather than a structural weakening.
The maturities of SFC's assets and liabilities are closely matched compared with peers, reducing refinancing and liquidity risks to a large extent, achieved by way of on-balance-sheet securitisations. However Fitch notes that over-reliance on such securitisations expose SFC to greater funding volatility and could limit its ability to expand its lending franchise to the level of unencumbered assets available on the balance sheet.
Fitch expects the slowing credit cycle and rising market interest rates to pressure SFC's net interest margin and return on assets (ROA) over the 12 months to end-September 2013, as SFC funded most of its fixed-rate lending portfolio with variable rate borrowings. However SFC's level of interest rate risk is in line with industry norms. Profitability levels in terms of ROA improved in H113 to 5.6%, mainly supported by lower credit costs coming off a more benign economic environment and improving economies of scale as branches that were newly established in the 12 months to FYE12 break even.
SFC was established in 1968 and accounted for approximately of 3% of licensed finance companies' assets in Sri Lanka at December 2011. It operates through a network of 46 outlets and a majority of the shareholding is held by members of the Balasuriya family.