Sri Lanka’s Mercantile Investments to sell Rs1bn bonds

May 20, 2013 (LBO) – Sri Lanka’s Mercantile Investments and Finance Plc (MIF) plans to sell one billion rupees in senior unsecured debt which has been rated ‘BBB+’ by RAM Ratings Lanka. The full statement is reproduced below:-

Mercantile Investment and Finance PLC’s LKR 1 billion Senior
Unsecured Listed Debentures (2013/2018) assigned BBB+/P2.

RAM Ratings Lanka has reaffirmed Mercantile Investments And Finance PLC’s (“MIF”
or “the Company”) respective long- and short-term financial institution ratings at
BBB+ and P2. Concurrently, we have assigned respective long- and short-term
ratings of BBB+ and P2 to the Company’s proposed LKR 1 billion Senior Unsecured
Listed Debentures (2013/2018). Both long-term ratings carry a stable outlook.

The ratings are upheld by MIF’s good capitalisation levels. They are, however, tempered
by its below-average asset quality as a result of its high exposure to equity
investments, its unseasoned loan portfolio given its recent rapid loan growth, and
below-average performance.

MIF is a licensed finance company (“LFC”) that has been in operation for over 48
years and operates with a branch count of 14. Furthermore, MIF had channelled its
funds towards lending in fiscal 2012, in contrast to previous years when funds were
directed mainly to investments in equity. Consequently, its loan portfolio has
expanded robustly in recent times.

MIF’s asset quality is deemed below average, weighed down by its high exposure to
non-core assets, i.e. equity investments amounting to 70.27% of shareholders’
funds, which far exceeds the Central Bank of Sri Lanka’s (“CBSL”) stipulated limit of
25%. The heightened exposure to equity investments increases the Company’s
vulnerability to market risk. On the other hand, MIF’s loan quality indicators
remained relatively unchanged, with its non-performing loans (“NPLs”) ratio clocking
in at 2.81% as at end-December 2012 (end-March 2012: 2.94%).

However, in absolute terms, the Company’s gross NPLs weakened 20.07% from LKR 309.85
million to LKR 372.05 million as at end-December 2012 amidst a loan growth of
27.28%. The bulk of NPLs arose from leased vehicles. Given MIF’s credit assets
growth of 27.28% during the same period, we deem its loan book to be relatively

The Company’s net interest margin (“NIM”) of 5.60% in 9M FY Mar 2013 compared
weaker to that of its LFC counterparts, owing to its high equity exposure.
Fluctuations in returns on equity investments render MIF’s performance volatile; as
such its high equity exposure is viewed negatively. However, the Company’s interest
income improved 76.02% (annualised) in 9M FY Mar 2013, backed by robust credit
growth, thereby reducing its earlier reliance on equity investment gains. MIF’s top
line improved by an annualised 19.57%, thereby easing its previously high cost-toincome
ratio (excluding equity gains) to levels on line with that of similar-rated LFC
peers. The ratio, however, is expected to deteriorate in the short run as the
Company is expected to open 5 new branches.

Supported by a better core
performance, MIF’s return on assets and return on equity improved to 4.42%
(annualised) and 14.94%, respectively in 9M FY Mar 2013 (FY Mar 2012: 3.28% and
9.66%). Overall, we deem the Company’s performance to be below average.
Elsewhere, MIF’s funding comprised deposits and borrowings, which accounted for a
respective 42.29% and 33.21% of its funding mix as at end-December 2012.

The Company’s securitised borrowings, which are longer-tenured (2-4 years), resulted in
an easing of its maturity mismatches. Meanwhile, MIF’s loans-to-deposits ratio
(“LD”) remained high at 177.53% (end-March 2012: 175.81%) due to its aggressive
loan growth increasingly funded by borrowings, as credit growth surpassed deposit
growth. On the other hand, deposits grew by 24.05% to LKR 7.14 billion in 9M FY
Mar 2013 (end-March 2012: LKR 5.72 billion), backed by the Company’s extended
branch reach and promotional campaigns.

MIF’s liquidity is viewed as adequate. Its statutory liquid-asset ratio stood at 12.64% as at end-December 2012 (end-March
2012: 12.76%) amid rapid loan growth and is presently in line with that of similarrated
peers. The Company’s liquid assets to customer deposits and short-term funds
ratio stood at 36.22% as at end-December 2012, better than similar-rated peers’.

Although MIF’s capitalisation moderated during the review period owing to the
robust expansion of its loan book, its capitalisation is still good compared to its
peers’. The Company’s tier 1 and overall risk-weighted capital-adequacy ratios
(“RWCAR”) deteriorated to 19.53% and 22.87%, respectively as at end-December
2012, from 22.40% and 27.17% as at end-March 2012, amidst robust credit

MIF does not have immediate plans to infuse capital into the Company and
intends to augment its credit assets by around 30% by end-December 2013. While
we opine that its capital cushioning will moderate further, resulting in an estimated
overall RWCAR of around 17%, the ratio will still be better than most similar-rated

“The ratings are upheld by MIF’s good capitalisation levels,” the rating agency said in a statement.

They are, however, tempered by its below-average asset quality as a result of its high exposure to equity investments, its unseasoned loan portfolio given its recent rapid loan growth, and below-average performance.”

MIF’s asset quality is below average due to a high exposure to non-core assets (equity investments) of 70.27 percent of shareholders funds which exceeds a limit set by the Central Bank at 25 percent.

Its non performing loan ratio was 2.81 percent at end December 2012 from 2.94 percent in March 2012.

In absolute terms gross NPLs weakened to 20.07 percent from 309.85 million rupees to 373.05 million by end December amid a loan growth of 27.2 percent, with most coming from leased vehicles.