Fitch Ratings Lanka has downgraded Melsta Regal Finance Ltd.’s (MRF) National Long-Term Rating to ‘B(lka)’ from ‘A+(lka)’ and removed the Rating Watch Evolving (RWE). A Stable Outlook has been assigned.
The agency has also affirmed the ratings of the following nine finance companies: 1. Central Finance Company, 2. LB Finance, 3. Senkadagala Finance, 4. Singer Finance, 5. Mercantile Investments, 6. People’s Leasing & Finance, 7. HNB Grameen Finance, 8. AMW Capital Leasing and Finance, 9. Siyapatha Finance.
The rating actions follow Fitch’s periodic review of Sri Lanka’s large and mid-sized finance companies.
Fitch expects the credit profiles of the country’s licensed finance company sector to remain under pressure in the medium term. Competition in leasing from banks and a deceleration in vehicle financing has pushed finance companies to look beyond their core businesses and venture into term financing, microfinance and lending against gold. Fitch believes the shift in business mix has raised the companies’ risk profiles in the absence or poor quality of collateral, challenges to the recoverability of collateral and a lack of experience in the new segments. This has already resulted in the industry’s reported non-performing loan (NPL) ratio (based on six month arrears) increasing to 5.8% at end-March 2018 (FYE18), from 4.9% at FYE17.
The sector also faces more stringent capital requirements and potential earning headwinds stemming from higher credit costs.
The ratings of the finance companies in the peer group are driven by their business models and franchises. Risk appetite, another rating driver, reflects the companies’ predominant exposures to more vulnerable customers and non-core business segments.
The resolution of the RWE and downgrade of MRF’s rating to reflect its standalone profile is because the agency views that support from the parent, Fairfax Financial Holdings Limited (Fairfax), cannot be relied upon. Fitch believes Fairfax’s stake in MRF is part of its portfolio of investments and does not have a strategic significance. Fairfax is MRF’s largest shareholder, with effective control of 70% via Bluestone1 (Private) Limited, an SPV established for the acquisition of MRF.
As such, MRF’s standalone profile is characterised by an evolving business model and small franchise (0.5% of sector assets at end-March 2018). The rating also captures potential pressure on MRF’s asset quality from its unseasoned loan book.