"The rating is however, constrained by its limited lending diversity, narrow deposit base and small franchise."
TFI has grown its loans 82.9 percent in the 2012 financial year following a surge in motor car imports.
"Fitch expects that TFI's unseasoned loan book is likely to face asset quality stresses unless strong monitoring and control measures are maintained on loan portfolio," the agency said.
The firm had an above average equity base and pre-tax return on assets adjusted for non-recurring items at an annualised 13.8 percent in the six months to September was also above the 6.6 percent average for similarly rated firms.
The full statement is reproduced below:
Fitch Affirms Trade Finance and Investments PLC at 'BB+(lka)'
13 Nov 2012 5:04 AM (EST) Fitch Ratings-Colombo/Mumbai/Singapore-13 November 2012: Fitch Ratings Lanka has affirmed Trade Finance and Investments PLC (TFI) National Long-Term Rating at 'BB+(lka)' with a Stable Outlook.
The rating factors in TFI's strong capitalisation and profitability metrics for a small-sized registered finance company (RFC).The rating is however, constrained by its limited lending diversity, narrow deposit base and small franchise.
The ratings may be downgraded upon continued strong loan growth and heightened portfolio concentration (towards two stroke three wheelers and motor cycles) leading to an elevated risk profile and weakened financial profile. A rating upgrade is less likely in the short to medium term, but could occur if there were concerted evidence of funding (deposit mobilisation) and lending diversification in line with the development of its franchise, while maintaining its financial profile relative to higher-rated peers.
TFI posted strong loan growth of 82.9% in FY12 (FY11: 36.7%) supported by lower import duties on vehicles in 2010-2011. Fitch expects that TFI's unseasoned loan book is likely to face asset quality stresses unless strong monitoring and control measures are maintained on loan portfolio.
The company's core business of vehicle finance, in the form of lease and hire purchase (HP), comprised of 78% and 19.4% of its loan book at the financial year to end-March 2012 (FYE12), with the balance consisting of loans. Three wheelers and motor cycles accounted for 69.4% of asset financed in FYE12 (FYE11:83.3% FYE10:83%).
Profitability measured by pre-tax return on assets (ROA) adjusted for non-recurring items was at 13.8% (annualised) in the six months to end-September 2012 (H113) (14.1% in FYE12) which was well above the similar rated peer average of 6.6%.
This was supported by wider net interest margins which benefit from high equity funded assets. NIMs are expected to narrow due to intensified competitive pressure and gradual change in funding mix (as more loans are expected to be funded by deposits).
Mainly due to the rapid loan growth, TFI's non-performing loan ratio improved to 12.9% for over three months in arrears, and 2.6% for over six months in arrears, of total advances at FYE12 (FYE11:16.1%, 4.5% respectively). However, Fitch notes that these loans are still new and as such NPLs could increase as the loan book seasons. Provision coverage for NPLs over six months was at 76.8% at end-H113 (FYE12:73.3%).TFI has maintained satisfactory provision cover compared with its peers.
TFI's funding is predominantly through equity and deposit from related parties. Deposits funds accounted for 40.5% of assets at end H113 (FYE12: 32.2%), where around 68.6% of deposits came from related parties.
Fitch expects TFI's capitalisation to come under pressure due to its expanding operation but to stay well above peers' level. Capitalisation measured by equity to asset ratio stood at 54.7% at H113 (FYE12:61.4%).The ratio was high on account of the equity infusion through an IPO in 2011 of LKR120m and high internal capital generation in light of strong profitability and high earnings retention.
TFI is a RFC incorporated in 1978. It was listed in the Colombo Stock Exchange in 2011 and the Cooray family owns around 75.16% of TFI. It operates through four branches and has an asset base of LKR1,139m at end H113.