Sri Lanka’s First Capital Holdings rated ‘BBB+’ by RAM

RAM Rating said the firm was well capitalized and had investment portfolio's with low credit risk but it was exposed to interest rate volatility and liquidity of Sri Lanka's government securities markets.

The full statement is reproduced below:

RAM Ratings Lanka assigns BBB+/P2 to First Capital Holdings PLC

RAM Ratings Lanka has assigned respective long- and short-term corporate credit ratings of BBB+ and P2 to First Capital Holdings PLC (“FCH” or “the Group”); the long-term rating has a stable outlook.

Meanwhile, we have also assigned a short-term rating of P2 to the Group’s LKR 500 million Unsecured Commercial Paper (2012/2013).

FCH is an investment-holding company with interests in primary dealing, margin trading, debt structuring and asset management. The ratings are upheld by the minimal credit risk of FCH’s trading and investment portfolios, good capitalisation and liquidity as well as its good risk management framework.

On the other hand, the ratings are pressured by the exposure of its key business to a range of factors including interest rates volatilities and liquidity of the government bond market in Sri Lanka.

The Group’s primary income generator is its largest subsidiary, First Capital Treasuries Limited (“FC Treasuries”), which accounted for a respective 74% and 86% of the Group’s revenue and gross profit in fiscal 2011. FC Treasuries is among the pioneer primary dealers (“PDs”) in Sri Lanka, appointed by the Monetary Board of the Central Bank of Sri Lanka (“CBSL) for the purpose of dealing with the CBSL as counterparties in the primary market and trading in the secondary market for government securities.

As such, the bulk of the Group’s trading and investment securities comprise government securities that carry minimal credit risk; investments in government securities accounted for more than 60% of the Group’s total assets as at end-December 2011.

Meanwhile, FC Treasuries’ capitalisation levels are deemed good; its risk-weighted capitaladequacy ratio (“RWCAR”) comfortably surpasses the industry average, having improved to 36.88% as at end-December 2011 (FYE 31 March 2011 (“FY Mar 2011”): 22.29%).

Government securities carry zero weight in terms of credit risk, resulting in good capitalisation levels for PDs; however, the reverse repurchase portfolios (“reverse REPO”) of PDs are risk-weighted for counterparty risk. Apart from its zero-weighted trading portfolio, FC Treasuries’ good RWCAR is further strengthened by its relatively small portfolio of reverse REPO which accounted for only 5.90% of its entire securities’ holdings.

RAM Ratings Lanka observes that FC Treasuries has a comfortable buffer to absorb losses that could rise from unfavourable fluctuations in interest rates, e.g. a 100-basis-point (“BP”) increase in interest rates pushed its RWCAR to around 29% as at end-December 2011, still deemed good.

FCH’s ratings are also supported by its good liquidity despite its funding profile being dominated by short-term REPO borrowings. Although nearly 90% of the Group’s assets consist of highly liquid government securities, roughly half of this has been pledged against REPO borrowings; approximately LKR 4.00 billion of trading securities are unencumbered and fully liquid as at end-December 2011. The Group also had LKR 900 million of contingent funding lines while having access to the CBSL’s intra-day liquidity facility for urgent liquidity needs.

In the meantime, FCH has a fairly good risk-management and monitoring framework, which can assist in minimising operational risks. Through an automated system, the Group continuously monitors the marked-to-market value of its trading portfolio. Moreover, client-wise portfolio exposure, loss-exposures are also monitored. The risk management systems are continuously upgraded.

Nevertheless, FCH’s ratings are pressured by FC Treasuries’ exposure to interest rate volatilities, which in turn is dependent on a range of factors including the liquidity of the government bond market, Government of Sri Lanka’s (“GOSL”) monetary policies, the state of the economy and the GOSL’s borrowing requirements.

Portfolio values fluctuate in line with interest-rate changes, and this volatility is reflected in FC Treasuries fluctuating performance over the years. The Group’s earnings profile is rendered further volatile owing to its margin trading subsidiary First Capital Markets Limited (“FCM”), which is exposed to the vagaries of the stock market. Notably, PDs are also exposed to changes in regulations.