"The ratings are supported by SLF’s adequate asset quality, financial performance, capitalisation and liquidity, but tempered by its moderate funding profile and lack of a seasoned loan portfolio," the rating agency said.
RAM said the firm has a 3.15 percent market share up from 1.
88 percent in March 2011, and gross non-performing loans of 0.94 percent which is lower than its peers.
The full statement is reproduced below
RAM Ratings Lanka has reaffirmed Softlogic Finance PLC’s (“SLF†or “the Companyâ€) respective long- and short-term financial institution ratings at BBB- and P3. Concurrently, RAM Ratings Lanka has assigned a long-term issue rating of BBB- to the Company’s LKR 500 million Redeemable, Senior Debentures (2012/2017). Both long-term ratings have a stable outlook.
The ratings are supported by SLF’s adequate asset quality, financial performance, capitalisation and liquidity, but tempered by its moderate funding profile and lack of a seasoned loan portfolio. Notably, the Company has managed to expand its market share in the last few years; as at end-September 2011, SLF’s market share had been enlarged to 3.15% (end-March 2011: 1.88%). Notably, this was supported by the Company’s increasing geographical presence and the improving macroeconomic landscape.
SLF’s asset quality is deemed adequate; although it’s gross non-performing-loan (“NPLâ€) ratio of 0.94% as at end-December 2011 was better than its peers’ (end-March 2011: 1.08%), our concerns hinge on the Company’s aggressive loan growth.
The lower NPL ratio was driven by its aggressive 139.
65% (annualised) loan growth (equivalent to LKR 3.98 billion) in the first 9 months of FYE 31 March 2012 (“9M FY Mar 2012â€) while absolute NPLs surged 66.59% (or LKR 43.91 million) to LKR 73.15 million as at end-December 2011. Given that a significant proportion of SLF’s loan book is relatively unseasoned; its NPL levels could worsen as these loans season.
Meanwhile, the Company’s performance is deemed adequate. Its net interest margin (“NIMâ€) improved from 9.11% in FY Mar 2010 to 9.96% in FY Mar 2011, before widening further to 10.19% in 9M FY Mar 2012 - surpassing those of most of its similarly rated peers. The broader NIM was supported by faster repricing of deposits amid receding interest rates and a higher proportion of securitisation loans and equity in the Company’s funding structure.
Looking ahead, we envisage it’s NIM to ease along with rising interest rates. Conversely, SLF’s cost-to-income ratio is weaker than its peers’, albeit improving over its historical levels due to its stronger top line. That said, the ratio had weakened slightly to 76.70% as at end-December 2011 (end-March 2011: 74.69%), as absolute overheads had increased to LKR 431.73 million (or annualised 124.27%) following the opening of 5 new branches.
As the Company intends to set up more branches in 2012, we expect its cost-to-income ratio to remain higher than its peers’ until the new braches breakeven. Supported by its better core performance, SLF’s pre-tax profit surged to LKR 121.62 million in 9M FY Mar 2012 (FY Mar 2011: LKR 84.79 million).
Elsewhere, the Company’s funding position is deemed moderate; deposits and borrowings (mainly securitisation) accounted for a respective 44.
19% and 43.25% of its funding mix as at end-December 2011 while its loans-to-deposits ratio (“LDâ€) remained high at 202.60% (end-March 2011: 238.80%) reflecting the aggressive loan growth. On the other hand, deposits surged 189.37% (annualised) to LKR 3.78 billion as at the same date (end-March 2011: LKR 1.57 billion), backed by its enlarged branch network and promotional campaigns. On a separate note, SLF’s liquidity is also viewed to be adequate. Its statutory liquid-asset ratio stood at 14.
56% as at end-December 2011 (end-March 2011: 17.13%) amid its rapid loan growth; the ratio is presently in line with those of its peers’.
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SLF’s capitalisation is deemed adequate. Its overall risk-weighted capital-adequacy ratio (“RWCARâ€) of 13.07% was largely unchanged and in line with its peers’ as at end-December 2011 (end-March 2011: 13.41%). Despite a LKR 535 million capital infusion by Softlogic Holdings in August 2011, the Company’s RWCAR stayed relatively unchanged as a result of its rapid credit expansion.