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Fitch Ratings has affirmed Abans Finance PLC's National Long-Term Rating at 'BBB+(lka)'. The Outlook remains Negative.
KEY RATING DRIVERS
Shareholder Support Underpins Rating: Abans Finance's rating is driven by our expectation that its major shareholder, Abans PLC (AA-(lka)/Stable), would provide extraordinary support to Abans Finance, if required.
Our expectation stems from Abans' position as the largest stakeholder in the financing company, its involvement in Abans Finance's strategic decisions through board representation, and common branding. This is notwithstanding Abans' past attempts to dispose of its stake in the company in recent years.
Negative Outlook: The Negative Outlook reflects downside risks to Abans Finance's support-driven rating due to a potential weakening in Abans' propensity to extend support to the subsidiary. This is in light of past sale attempts as well as a regulatory capital shortfall since October 2023, which has led the authorities to impose a renewed deposit cap on the company.
Our rating case is for management to restore the capital position within the next 12 months. However, the finance company's weak performance and lagging capital position raises uncertainties around parental support.
Limited Role in Group: We rate Abans Finance four notches below its parent due to its limited role in the group, as it contributes only a negligible share of Abans' consumer- durables revenue. In addition, we believe Abans Finance remains a candidate for disposal.
Abans has been diluting its stake in Abans Finance since November 2016, although a rights issue in 2022 led to a marginal increase in its stake.
Materially Weak Standalone Profile: We believe that Abans Finance's intrinsic financial strength is significantly weaker than its support-driven rating, reflecting its small franchise, limited operating history, high risk appetite and weak financial profile.
Abans Finance's asset-quality metrics are some of the weakest among Fitch-rated peers. However, we expect some moderation in default rates in the near to medium term, on account of easing interest rates and a pick-up in economic activity.
Limited Capital Buffers: We expect Abans Finance to operate with a limited buffer over the regulatory minimum capital of LKR2.5 billion, until the provisioning gap is meaningfully resolved. Furthermore, we expect an uptick in leverage as Abans Finance pursues growth in the medium term. Debt/tangible equity stood at 2.4x at end-2023, lower han the Fitch-rated peer average and the historical average.
Loan Book to Expand: We expect Abans Finance to pursue rapid growth in the near to medium term, on improving economic activity and easing interest rates. Some diversification is likely, but we expect three-wheeler and two-wheeler financing to remain core to Abans Finance's lending (FYE23: 83% of loans).
Asset Quality to Improve: We forecast Abans Finance's non-performing loan (NPL, 90 days past due) ratio to decline moderately in the financial year ending March 2025 (FY25), owing to easing pressures on existing borrowers from improving economic activity, redoubling of recovery efforts and projected loan book growth.
We expect Abans Finance's NPL ratio to remain generally above Fitch-rated peers through the cycle because of its predominant exposure to high risk three-wheeler and two-wheeler leasing. The NPL ratio stood at 26.1% at end-September 2023, higher than the industry's 20.0%.