Fitch Ratings has downgraded Abans Finance PLC's National Long-Term Rating to 'A-(lka)' from 'A(lka)'. The Outlook is evolving, a statement said.
The rating agency has also downgraded the company's proposed senior unsecured debt to 'A- (EXP)(lka)', from 'A(EXP)(lka)'.
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KEY RATING DRIVERS
The downgrade follows the downgrade of the National Long-Term Rating of Abans Finance's parent - Abans PLC - to 'AA-(lka)', from 'AA(lka)', on 26 January 2022; see Fitch Downgrades Abans to 'AA-(lka)'; Outlook Stable.
Abans' ability to support Abans Finance has weakened due to its deteriorating credit profile, which is underpinned by its standalone strength. We continue to factor in parental support for Abans Finance, as Abans is still its largest shareholder, is involved in Abans Finance's strategic decisions through board representation and shares a brand name.
However, we rate Abans Finance three notches below its parent due to its limited importance in terms of its role in the group, as it contributes only a negligible share of Abans' consumer durables revenue, the parent's decreased shareholding and high potential for disposal. Abans' diluted its stake to 50% alongside capital infusions from Ironwood Investment Holdings Pvt Limited - a private equity investor with a large minority stake of 41.9% acquired since November 2016 - to meet regulatory requirements. Abans' intention to dispose of Abans Finance is evident in its classification of the finance subsidiary as 'Held for sale and discontinued operations' in its financial statements.
The Evolving Outlook reflects the uncertainty around the potential disposal of Abans Finance. Abans Finance may reach the LKR2.5 billion core capital requirement by the extended deadline, but recent attempts by Abans to dispose of its stake, in conjunction with the Central Bank of Sri Lanka's financial-sector consolidation plan and ongoing vehicle import ban, which limits prospects for the sector, affects our assessment of Abans' propensity to extend extraordinary support to its subsidiary.
We believe Abans Finance's intrinsic financial strength is significantly weaker than its support-driven rating. This is due to its small franchise, limited operating history, high risk appetite and weak financial profile. Established in June 2009, Abans Finance accounts for less than 1% of sector assets.
Its regulatory six-month gross non-performing loan ratio of 24.4% at the end of the first half of the financial year ending March 2022 (1HFY22) (FY21: 23.4%) was weaker than that of most small-sized peers and stems from its significant exposure to customer segments that are vulnerable to deteriorating economic conditions. Abans Finance's pre-tax profit/average assets remained flat at 5.8% at end-1HFY22 (FY21: 5.9%, FY20: 2.7%) due to lower funding costs and impairment charges.
The rating on Abans Finance's senior unsecured debt is in line with its National LongTerm Rating, as the debt constitutes its unsubordinated obligations.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade: Fitch believes an upgrade could result from an upgrade of Abans' rating or a significant increase in Abans Finance's importance to its parent while the parent retains controlling ownership in the subsidiary, which could narrow the notching.
However, we do not expect such a change in the near to medium term due to Abans' plan to dispose of the subsidiary. Should this occur, Fitch will assess the ability and propensity of the new ultimate parent to support the finance company in times of need.
The introduction of a new core shareholder that is rated higher than Abans would be rating positive. An upgrade of Abans Finance's National Long-Term Rating would lead to an upgrade on the rating of the proposed senior debt. Factors that could, individually or collectively, lead to negative rating action/downgrade: The rating could be downgraded if Abans' ability to provide support were to weaken, as signalled through negative rating action on Abans.
Any further weakening in Abans' propensity to support Abans Finance may result in the removal of parental support and lead to a downgrade. If institutional support cannot be relied on or the rating based on institutional support falls below the rating based on standalone strength. the rating would be reassessed based on Abans Finance's standalone credit profile, which is multiple notches below its current rating.
Issuer Disclosure on Regulatory Action As at 31 January 2022, Abans Finance's deposit base stood at LKR 4.34 billion. Until the Central Bank of Sri Lanka (CBSL) review upon Abans Finance reaching the core capital requirement of LKR 2.5 billion, CBSL has granted the approval to Abans Finance to accept deposits up to LKR5 billion.