Mar 05, 2012 (LBO) – RAM Ratings Lanka said it had given a ‘BBB-‘ rating with a stable outlook to a 500 million rupee senior redeemable debenture debenture to be sold by Softlogic Finance Plc. “The ratings are supported by SLFâ€™s adequate asset quality, financial performance, capitalisation and liquidity, but tempered by its moderate funding profile and lack of a seasoned loan portfolio,” the rating agency said.
RAM said the firm has a 3.15 percent market share up from 1.88 percent in March 2011, and gross non-performing loans of 0.94 percent which is lower than its peers.
The full statement is reproduced below
RAM Ratings Lanka has reaffirmed Softlogic Finance PLCâ€™s (â€œSLFâ€ or â€œthe Companyâ€) respective long- and short-term financial institution ratings at BBB- and P3. Concurrently, RAM Ratings Lanka has assigned a long-term issue rating of BBB- to the Companyâ€™s LKR 500 million Redeemable, Senior Debentures (2012/2017). Both long-term ratings have a stable outlook.
The ratings are supported by SLFâ€™s adequate asset quality, financial performance, capitalisation and liquidity, but tempered by its moderate funding profile and lack of a seasoned loan portfolio. Notably, the Company has managed to expand its market share in the last few years; as at end-September 2011, SLFâ€™s market share had been enlarged to 3.15% (end-March 2011: 1.88%). Notably, this was supported by the Companyâ€™s increasing geographical presence and the improving macroeconomic landscape.
SLFâ€™s asset quality is deemed adequate; although itâ€™s gross non-performing-loan (â€œNPLâ€) ratio of 0.94% as at end-December 2011 was better than its peersâ€™ (end-March 2011: 1.08%), our concerns hinge on the Companyâ€™s aggressive loan growth. The lower NPL ratio was driven by its aggressive 139.65% (annualised) loan growth (equivalent to LKR 3.98 billion) in the first 9 months of FYE 31 March 2012 (â€œ9M FY Mar 2012â€) while absolute NPLs surged 66.59% (or LKR 43.91 million) to LKR 73.15 million as at end-December 2011. Given that a significant proportion of SLFâ€™s loan book is relatively unseasoned; its NPL levels could worsen as these loans season.
Meanwhile, the Companyâ€™s performance is deemed adequate. Its net interest margin (â€œNIMâ€) improved from 9.11% in FY Mar 2010 to 9.96% in FY Mar 2011, before widening further to 10.19% in 9M FY Mar 2012 – surpassing those of most of its similarly rated peers. The broader NIM was supported by faster repricing of deposits amid receding interest rates and a higher proportion of securitisation loans and equity in the Companyâ€™s funding structure. Looking ahead, we envisage itâ€™s NIM to ease along with rising interest rates. Conversely, SLFâ€™s cost-to-income ratio is weaker than its peersâ€™, albeit improving over its historical levels due to its stronger top line. That said, the ratio had weakened slightly to 76.70% as at end-December 2011 (end-March 2011: 74.69%), as absolute overheads had increased to LKR 431.73 million (or annualised 124.27%) following the opening of 5 new branches. As the Company intends to set up more branches in 2012, we expect its cost-to-income ratio to remain higher than its peersâ€™ until the new braches breakeven. Supported by its better core performance, SLFâ€™s pre-tax profit surged to LKR 121.62 million in 9M FY Mar 2012 (FY Mar 2011: LKR 84.79 million).
Elsewhere, the Companyâ€™s funding position is deemed moderate; deposits and borrowings (mainly securitisation) accounted for a respective 44.19% and 43.25% of its funding mix as at end-December 2011 while its loans-to-deposits ratio (â€œLDâ€) remained high at 202.60% (end-March 2011: 238.80%) reflecting the aggressive loan growth. On the other hand, deposits surged 189.37% (annualised) to LKR 3.78 billion as at the same date (end-March 2011: LKR 1.57 billion), backed by its enlarged branch network and promotional campaigns. On a separate note, SLFâ€™s liquidity is also viewed to be adequate. Its statutory liquid-asset ratio stood at 14.56% as at end-December 2011 (end-March 2011: 17.13%) amid its rapid loan growth; the ratio is presently in line with those of its peersâ€™.
SLFâ€™s capitalisation is deemed adequate. Its overall risk-weighted capital-adequacy ratio (â€œRWCARâ€) of 13.07% was largely unchanged and in line with its peersâ€™ as at end-December 2011 (end-March 2011: 13.41%). Despite a LKR 535 million capital infusion by Softlogic Holdings in August 2011, the Companyâ€™s RWCAR stayed relatively unchanged as a result of its rapid credit expansion.