Sri Lanka’s LB Finance debt rated ‘BBB+’ by RAM

Nov 19, 2013 (LBO) – RAM Ratings Lanka said it has given a ‘BBB+’ rating to a proposed 2.0 billion subordinated debt issue by LB Finance, a notch below its ‘A-‘ domestic entity rating. As such the Company’s funding composition remained dominated by deposits increasing to 76.71% as at end-August 2013. In line with the expansion in the Company’s deposit base coupled with slower loan growth the Company’s LD ratio improved to 118.65% as at end-FY Mar 2013 (FY Mar 2012: 137.22%) improving further to 112.35% as at end-August 2013.

Meanwhile we note that in view of slower loan growth the Company had reduced its reliance on borrowings which declined 17.62% y-o-y in fiscal 2013. Elsewhere, LBF’s liquidity is viewed as adequate. Its statutory liquid-asset ratio clocked in at 13.43% as at end-March 2013 and remained relatively unchanged as at 13.85% as at end-August 2013 amidst slower loan growth and remained in line with peers.

LBF’s capitalisation levels are above average. It’s tier-1 and overall RWCAR levels clocked in at 14.02% and 15.40%, respectively as at end-FY March 2013 (FY Mar 2012: 12.53% and 14.81%) and dipping to 11.79% and 13.06% as at end-August 2013 amidst loan growth and compared better than peers. Going forward, overall RWCAR is expected to improve in view of moderate loan growth coupled with the planned issuance of subordinated debentures.

RAM said its gross non-performing loan ratio increased amid tighter economic conditions but it was helped by low defautls on three-wheeler loans, despite gold backed loan delinquencies starting to come in.

The full statement is reproduced below:-

M Ratings Lanka assigns BBB+ to LB Finance’s proposed LKR 2 billion debenture; entity rating reaffirmed at A-/P2

RAM Ratings has reaffirmed LB Finance PLC’s (“LBF” or “the Company”) respective long- and short-term financial institution ratings at A- and P2. Concurrently, a long term rating of BBB+ has been reaffirmed to LB Finance’s issued LKR 545 million Unsecured Redeemable Subordinated Debentures (2011/2016).

Further, a long term rating of BBB+ has been assigned to LB Finance’s proposed LKR 2.0 billion Unsecured Redeemable Subordinated Debentures (2013/2018). All the long-term ratings are to carry a stable outlook.

The ratings are upheld by LBF’s strong market position among licenced finance companies (“LFC”) in Sri Lanka, its strong franchise, above-average asset quality and average performance.

Overall, we deem that the Company’s above-average asset quality; while its gross NPL ratio remained in line with peers supported by the low delinquency rate on its three-wheeler portfolio, its NPL coverage ratio compared better than similar rated peers.

However absolute gross NPLs increased 74.98% y-o-y (or LKR 792.55 million) in FY Mar 2013 while increasing a further 7.40% in 5M FY Mar 2014, reflective of the loan books seasoning amidst less favourable macro-economic conditions. This was largely supported by the low delinquency rate of 1.69% as at end-August 2013 recorded on its three-wheeler financing portfolio. Overall, while LBF’s gross NPL ratio dipped to 2.81% as at end-FY Mar 2013 (FY Mar 2012: 2.73%), it moderated to 3.69% as at end-August 2013.

Meanwhile, The Company’s gross NPL coverage ratio clocked in at 74.01% as at end-August 2013 improving from 67.27% as at end-FY Mar 2013 (end-FY Mar 2012: 78.31%) and compared favourably to similar-rated peers. Nonetheless, RAM Ratings Lanka notes that LBF’s historically healthy asset quality indicators have somewhat weakened as the seasoning took effect in a less favourable macro-economic environment while delinquencies trickle in on its gold loan segment.

The Company’s performance is deemed average as performance indicators declined to levels which were in line with peers while pre-tax profits remained relatively stagnant compared to the previous year. LBF’s NIM thinned to 9.70% in fiscal 2013 (fiscal 2012: 11.36%), narrowing further to 7.13% in 5M FY Mar 2014 amid rising cost of funding given the rising interest rates; this was observed among most of its LFC counterparts. Meanwhile, LBF’s cost to income ratio increased to 58.48% in 5M FY Mar 2014 from 43.94% in fiscal 2013 (fiscal 2012: 41.75%) owing to branch expansions that resulted in higher overhead expenses.

Further in line with slower net interest income growth, the Company’s pre-tax profit of LKR 2.52 billion remained relatively stagnant compared to the previous year. Going forward, while we expect core performance to improve given easing interest rates, overall performance is expected to be hampered by rising overhead costs.

Meanwhile, LBF’s funding is viewed as good. The Company’s franchise is stronger than most of its peers’, which coupled with its extensive branch network, has allowed it to
retain the largest deposit base among LFCs in Sri Lanka, as at end-March 2013. LBF’s deposits continued to grow 42.58% y-o-y in fiscal 2013 (fiscal 2012: 34.10%).