Fitch Ratings has updated and confirmed the MIF to Negative from Stable Outlook on Mercantile Investment and Finance, PLC.
At the same time, Fitch confirmed its ratings on –Central Finance Company PLC (CF)–LB Finance PLC (LB)–Senkadagala Finance PLC(Senka)–Leasing and financing firms (PLC)–People’s Finance PLC(PLC) Sri Lanka’s financial firms have been reviewed regularly by Fitch. At the end of this rating action commentary, there is a complete list of rating actions.
NATIONAL RATING KEY RATING DRIVERS Fitch expects to see medium-term pressures on asset quality and profitability by Sri Lankan financial institutions that are non-bank financial institutions. The NPL (overdue over 180 days) ratio in the sector has risen to 7.7% by March 2019, from 5.9% by March 2018 and we expect the target customer base to continue throughout the financial year. In relation to the effect of increasing loan expenses due to a weakening asset quality as well as the implementation of SLFRS 9, higher economic institutions ‘ taxes reduced profitability in the financial year ending March 2019 (FY19) by 28 percent.
The assessments of financial firms within the peer group are based on their high-risk appetite, which is reflected in the mainly vulnerable client sections of businesses. The evaluations are extremely susceptible to the trends of asset quality and our evaluation of the supply of resources to absorb this stress.
The negative view of MIF’s national long-run rating expresses our belief that capital buffers of MIF could further deteriorate because of pressures on its already weak asset quality and below average earning generation. The negative outlook represents MIF’s expectations for its long-term rating.
The National Long-Term Rating of MIF represents its strong risk appetite based on its weak underwriting norms, changing risk controls and heavy dependence on concentrating short‐term financing, leading to significant adverse mismatches in maturity. The assessment also requires an account of the lengthy history of the company.
The asset quality of MIF was further degraded at 9.6% (FY18: 7.6%), as measured from its reported 6-month gross NPL regulatory ratio, and stood above 7.7% in end-FY19. Despite the possibly important recoveries from its single biggest NPL (supported by collateral), which accounts for about 4% of the gross loans, we expect to continue to raise the NPL percentage for the MIF in the medium term owing to working environment problems.
We think that the focused deposit base of MIF and dependence on short-term financing puts its financial profile at risk especially in a difficult operating environment. Short time financing represented 75% of complete FY19 financing (FY18: 71%), which we believe does not cover the adverse maturity mismatches properly in its unused loan schemes. Deposits are expected to continue to be a significant source of financing for the MIF (FY19: 70%).
The appetite of CF CF represents the elevated threat of its retail-oriented credit book, which concentrates on three-wheels registered, and reduced quality of the asset. This is mitigated partially by the good funding of CF backed by the above-profitability of the industry. The rating also includes the proven franchise of CF, which is backed up by a strong market share and a lengthy 61-year national operating record.