Softlogic Finance rated by RAM
Softlogic Finance PLC’s respective long and short-term financial institution ratings has been assigned respectively, a “BBB-“ and “P3” by RAM Ratings Lanka.
The outlook on the long-term rating is stable.
RAM says the ratings are premised upon the improvement in Softlogic Finance PLC’s market position while maintaining its asset quality at a level that commensurate with the BBB-rating category.
Following is the full rating release issued by RAM Ratings Lanka of Softlogic Finance
RAM Ratings Lanka has assigned respective long- and short-term financial institution ratings of BBB- and P3 to Softlogic Finance PLC (“SLF” or “the Company”); the outlook on the long-term rating is stable.
The ratings are premised upon the improvement in its market position while maintaining its asset quality at a level that commensurate with the BBB-rating category. Moreover, the ratings are also upheld by the adequate asset quality, performance, capitalization and liquidity while being tempered by moderate funding and aggressive loan growth.
Formerly known as Capital Reach Leasing Ltd, SLF is a registered finance company (“RFC”) and comes under the purview of the Central Bank of Sri Lanka (“CBSL”). In August 2010, Softlogic Holdings PLC (“SLH” or “the Group”) acquired 53.84% of Softlogic Capital PLC (“SLC”) formerly known as Capital Reach Holdings Ltd (“CRHL”); SLC in turn has a direct stake of 62.17% in SLF. Since then, SLH has provided financial support in terms of capital infusions.
Furthermore, SLF leverages on the Group’s well-known franchise to garner deposits; this is reflected in the aggressive growth in deposits and better renewal rates. Meanwhile, SLF has been able to increase its market share (in terms of assets) in the RFC industry to 1.88% as at end-March 2011 from 1.01% in the previous year.
We opine SLF’s asset quality to be adequate. While the loan growth is aggressive at 168.74% (annualised) and there has been an influx of absolute NPLs during the 5M FYE 31 March 2012 (“5M FY March 2012”), SLF’s gross non performing loans (“NPL”) ratio stood at 0.98% as at end-August 2011 was the best among the similar rated peers.
Despite the majority of its loan portfolio being unseasoned and the high possibility of NPLs rising as a result of its aggressive loan expansion, the Company has ample buffer to bear further NPLs compared to peers at the BBB rating category. The Company’s loan base mainly consists of hire purchase (“HP”) and leases of commercial vehicles. With regards to sectoral exposure, it is most exposed to the services and trading sectors.
SLF’s performance is viewed to be adequate. In line with the improving interest income and loan growth, NIM improved from 9.11% FY March 2010 to 9.96% in FY March 2011, better than most of similar-rated peers. NIM ameliorated owing to faster repricing of deposits relative to its long-term, fixed-rate loan portfolio amid the receding interest rates and the high proportion of securitisation loans and equity in its funding structure. SLF’s cost-to-income ratio is weaker compared to peers but it has improved to 74.69% in FY March 2011 (FY March 2010: 80.87%) on the back of an expanded top line which led to higher profitability. That said, we observed a jump in absolute overheads in fiscal 2011 by LKR 131.65 million (or 53.11%) as SLF has opened 5 new branches during last year.
As the Company intends to open 8 more branches during fiscal 2012, we expect its cost-to-income ratio to remain higher than its peers. Along with the improved top line and NIM, SLF’s pre-tax profits surged to LKR 84.79 million in FY March 2011 from LKR 26.16 million in FY March 2010. Meanwhile, the Company’s return on assets (“ROA”) too improved to 2.69% in FY March 2011 from 1.72% in the previous year.
SLF’s funding is deemed to be moderate; the Company depends mainly on borrowings (mainly securitisation), which makes up 48.69% of total funding as at end-FY March 2011. As such, SLF’s loan-to-deposit ratio (“LD”) stood at a high 238% as at end-FY March 2011. On a separate note, SLF’s liquidity is viewed to be adequate. Its statutory liquid asset ratio stood at 17.13% as at end-FY March 2011, reducing from 21.04% during last fiscal year owing to rapid loan growth. Nonetheless, as at end-August 2011, the statutory liquid asset ratio improved to 21.19% owing to the rights issue. While SLF’s liquidity ratio has surpassed the peers at present, the ratio is expected to ease given its aggressive loan growth. Meanwhile, the use of long-term securitised borrowings has improved asset liability maturity matching (“ALMM”).
RAM Ratings Lanka opines SLF’s capitalization to be adequate. The risk weighted capital adequacy ratio (“RWCAR”) improved to 13.41% as at end-FY March 2011 from 12.88% in the previous year owing to the capital infusion by the Group amounting to LKR 267.53 million and better internal capital generation. Moreover, the ratio further improved to 15.87% in 5M FY March 2012 owing to another capital infusion by the Group amounting to LKR 535 million. Nonetheless, we expect this to moderate with the planned loan growth.