ICRA Lanka, a rating agency has assigned a [SL] BBB with a stable outlook for Citizens Development Business Finance PLC. The full statement as followed : - ICRA Lanka Limited, a wholly owned subsidiary of ICRA Ltd, a group company of Moody’s Investors Service has assigned a [SL]BBB (pronounced SL triple B) with a stable outlook issuer rating for Citizens Development Business Finance PLC (CDB or the Company). The rating factors CDB’s established franchise, good competitive position in Sri Lanka, professional and experienced management team and its strong appraisal and monitoring systems. The credit rating however takes note of the deterioration in the CDB’s asset quality during Financial Year (FY) 2014 and in FY2015 resulting in moderation in the profitability indicators, the company’s relatively high gearing level and high dependence on deposits. Arresting incremental slippages along with recovery from the existing NPAs/repossessed assets and diversification of its funding profile going forward would be key sensitivities. CDB operates a conventional asset backed lending portfolio focusing mainly on Auto Finance (93%), while other loans including loan against deposits, personal loans, pawning accounted for the remaining as in March 2015. The company’s portfolio growth moderated to about 14% in FY 2015 from 33% in FY2014. The company’s main focus over the past had been 3-wheeler financing; however it is expected to reduce the share of 3-wheeler segment going forward with incremental focus on other 4-wheeler asset classes (cars, vans, commercial vehicles) from FY2015 in line with its strategy to improve the overall portfolio asset quality. The recent pressure witnessed in the asset quality was largely on account of the 3-wheeler segment (gross NPA in 3-wheeler segment stood at 9.6% as compared to the CDB’s overall NPA of 5.8% in March 2015). The share of 3-wheelers in the overall portfolio moderated to 35% as of June 2015 (36% in March 2015) as compared to 42% in March 2014 with a corresponding increase in the Cars & Vans to 50% in June 2015 (48% in March 2015) as compared to 32% in March 2014. CDB’s pawning portfolio recorded a significant growth (84%) during FY2013 and accounted for 5% of CDB’s total portfolio as of March 2013, however following the deterioration observed in the asset quality of the pawning portfolio, the company has brought down its pawning exposure to less than 1% as of March 2015. CDB reported a Gross NPA Ratio of 5.8% as of March 2015 (Mar-14 - 5.2%) down from 2.3% reported as of March 2013.The asset quality improved to an extent in the current financial year with Gross NPAs moderating to 5.4% in August 2015. The company’s 3-wheeler portfolio was the highest contributor for NPAs accounting for over 60% of total NPAs (3-wheeler account for 36% of the total portfolio) as of March2015. ICRA Lanka notes that CDB also holds repossessed stock accounting for about 45% of the company’s total NPAs as of March 2015. ICRA Lanka expects the company to reduce the repossessed stock over the next few quarters, which should contribute to the improvement in overall NPA ratios. CDB reported a Net NPA ratio of 3.2% as of March 2015, resulting in moderate provision coverage of about 46%. ICRA Lanka notes that CDB’s ability to arrest incremental slippages and, realizing income from the sale of repossessed stock with minimal overall losses in the due process would be crucial from a credit perspective. CDB’s funding is steered through fixed deposits (80%) and savings deposits (4%) as of March 2015. The ALM mismatches in the shorter term time brackets (less than 1 year mismatches 12% of total assets) as of March 2015 is comparable to the peers. About 75% of the CDB’s total deposits had a contractual maturity of more than 1 year as of March 2015 and deposit renewal rates in the past were about 70-75%; this provides comfort from a liquidity perspective. ICRA Lanka also takes note of the management’s plan to mobilize longer tenure funding; an initiative to reduce the cost of funds, diversify its funding profile and improve liquidity. CDB reported a total Capital Adequacy Ratio (CAR) of 12.9% as of March 2015 (Mar-14 – 16.0%, Mar-13 – 14.3%), which is comparable to the industry average. ICRA Lanka notes that improvements in CDB’s capitalization would be vital going forward considering the high gearing reported by the company; 7.8 times as of March 2015. The company’s overall earnings profile is characterised by a small moderation in the NIMs to about 8.0% for FY2015 (FY2014 - 8.1%, FY2013 – 8.3%) notwithstanding the moderation in the cost of funds, as CDB shifted its focus to lower yielding asset classes. The company’s operational efficiency moderated during FY2015 with Operating cost to Operating income ratio increasing to 57% for FY2015 as compared to 55% for FY2014. The increase in the operating expenses could be attributed to the increase in the outlets, by about 15, in the second half of FY2014 and the corresponding manpower additions. CDB also moved to new office premises during FY2015, which resulted in some increase in the depreciation expense and, this along with higher marketing related expenses also contributed to the increase in the operating expenses. While the company’s credit costs (1.8%) remained high in FY2014 due to the losses on account of the pawning portfolio, the same in FY2015(1.3%) was impacted due to the losses on account of the sale of repossessed stock. As of March 2015, the company has repossessed stock of about LKR 800 Million, ability to recover from these assets would be critical for the overall profitability in the next 1-2 years. CDB’s reported return on average assets (ROAA) has remained largely stable over the last two years at about 1.9-1.95% levels. Going forward, ICRA Lanka expects CDB’s yields on the portfolio to moderate due to diversification to lower yielding asset classes; however rationalisation in the operating costs by the way of optimal business expansion and, its ability to control credit cost would be critical for the improvement in the profitability indicators.