K Seeds Investments (Pvt) Ltd identified Commercial Credit and Finance PLC as the best performing finance company under the 1st category among the 28 listed finance companies in Sri Lanka through a ranking carried out based on their financial performance for the fourth quarter of 2023/24.
The report segregates the finance companies based on the size of their asset base and ranks them in their respective categories among their peers based on ten financial metrics, which are calculated from the quarterly financial statements.
Commercial Credit and Finance PLC topped the overall spectrum by belonging to “Category 1” (asset base > Rs. 100 billion). The Categories 2, 3 and 4 represent the companies having an asset base between Rs. 50 to 100 billion, 20 to50 billion and less than 20 billion respectively.
K Seeds Investments is a boutique investment banking firm, specialising in mergers and acquisitions, balance sheet restructuring, equity /debt placements, treasury management, corporate restructuring and talent management.
During the quarter under review, from 1st January to 31st March, 2024, Sri Lanka's financial sector faced a multi-faceted set of challenges, deeply influenced by the country's broader economic difficulties. The sector was navigating through an ongoing economic crisis, marked by uncertainties and a slowdown in economic growth. In this challenging macro-economic landscape, some financial institutions managed to demonstrate resilience.
The licensed finance companies confronted a myriad of challenges predominantly driven by somewhat contracted demand for traditional lease finance and term funding businesses with the continued import restrictions on motor vehicles, necessitating adaptive strategies to mitigate risks and sustain operations in a challenging environment.
The confluence of economic contraction, elevated inflation rates and tax adjustments exerted sustained pressure on the debt repayment capabilities of households and businesses alike resulting in a notable uptick in non-performing loans (NPL) deteriorating the asset quality and heightened default risks across the sector, during first two quarters of the financial year.
Additionally, upward tax revisions since 2023, applied on income tax and Value Added Taxes starting 2024, compounded the financial strain further, pegging back disposable income and thus contracting demand for credit, amplifying pressures on sector profitability.
The resolution of the Domestic Debt Optimisation (DDO) by June 2023 played a key role in stabilising the financial sector and alleviating market stress. This resulted in a sharp decline in interest rates, with policy rates dropping by 700 basis points. Targeted monetary policy interventions successfully curbed inflation. This stability paved the way for positive economic growth in the following two quarters, with contributions from all sectors.
After enduring a particularly volatile year in 2022, the Sri Lankan economy began to improve during the year under review, revealing green shoots of recovery based on the reform path set out by the International Monetary Fund’s (IMF) Extended Fund Facility (EFF) programme.
In particular, the Central Bank of Sri Lanka (CBSL) relaxed its policy rates in 2023 to stimulate economic growth, which was reflected in a positive GDP growth in the second half of 2023 after a series of negative quarters since the economic crisis.
Meanwhile, the strong rebound in tourism sector earnings along with robust growth in inward remittance flows assisted in alleviating currency pressure which helped to restore the stability in the exchange rate and saw the LKR appreciating which contributed significantly to the improvement in local and domestic currency.
Throughout this period, the financial sector in Sri Lanka demonstrated an admirable degree of adaptability and resilience, despite facing numerous challenges stemming from the economic crisis and its widespread repercussions.
However, despite all these factors, Commercial Credit and Finance PLC managed to maintain their top rank in the series of ranking reports released by K Seeds Investments on the finance sector of Sri Lanka.
The report ranks the finance companies according to their financial results released through interim reports on ColomboStock Exchange across ten key performance indicators (KPIs) – cost to Income ratio, net profit margin,Impairment to loan book, return on equity , return on assets, net interest margin,credit to deposits, operating leverage, net profit growth and loan growth. These ten KPIs are weighted equally and an overall ranking is arrived at, based on the aggregate score for each category.