RAM Ratings Lanka has reaffirmed Citizens Development Business Finance PLC’s (“CDB” or “the Company”) respective long- and short-term financial institution ratings at BBB and P2.
CDB is a medium-sized licensed finance company (“LFC”), accounting for 4.34% of the industry’s assets as at end-March 2012, up from 3.40% a year earlier. The Company’s primary activities include leasing, hire-purchase (“HP”) and personal credit facilities. In recent times, it has also ventured into pawning. CDB obtains funding through public deposits and borrowings.
The Company’s asset quality is opined to be good; its credit quality indicators have consistently been better than those of similar-rated peers, supported by its focus on three-wheeler financing which had generally exhibited a lower delinquency rate than peers’. However, despite growth in its three-wheeler portfolio, the delinquency rate for three-wheelers remained high compared to other asset classes in fiscal 2012, as new non-performing loans (“NPLs”) trickled in. Nevertheless, CDB has managed to reduce its total absolute NPLs by 22.46% in fiscal 2012, attributable to better recoveries. This together with the aggressive expansion of its loan book led the Company’s gross NPL ratio to improve 1.66% (fiscal 2011: 3.56%), before weakening slightly to 1.90% in 1Q FYE 31 March 2013 (“FY March 2013”) as new NPLs trickled in; albeit still better than most peers’. That said, our concerns hinge on CDB’s unseasoned portfolio, given its aggressive year-on-year (“y-o-y”) growth of 65.50% in fiscal 2012, which had mainly stemmed from three-wheeler financing (38% growth); this may give rise to NPLs as the portfolio seasons. Meanwhile, the NPL coverage continued to be better than peers’ at 92.27% as at end-FY Mar 2012. Looking ahead, NPLs might come in given the weakening macro-economic conditions and the possibility of an oversupply of three-wheelers that are used as taxis, given the rapid growth experienced in the past.
The Company’s performance is deemed above average, backed by its wider net interest margin (“NIM”) and return on assets (“ROA”) which compared better to similar-rated peers’. In 1Q FY March 2013, although slightly affected by rising interest rates, as deposits repriced faster than loans, CDB’s NIM at 8.03% remained better than most peers. This was supported by its focus on the higher-yielding three-wheeler financing. CDB’s performance had, however, been moderated by increased overheads as a result of aggressive branch expansion; its cost-to-income ratio1 continued to remain high, although improving slightly to 61.96% in fiscal 2012 (fiscal 2011: 67.07%). Looking ahead, performance might weaken due to the Company’s high cost profile and expected slower credit demand amid a non-conducive economic environment.
CDB’s funding base continued to be dominated by customer deposits, aided by the Company’s widening branch reach and its aggressive advertising and marketing strategies. Its loans to deposit ratio clocked in at 116.81% as at end-FY March 2012 (end-FY March 2011: 105.26%), before improving to 111.98% by 1Q FY March 2013, relatively in line with peers’. Elsewhere, CDB’s liquidity is deemed above average; its statutory liquid asset ratio remained relatively unchanged at 13.26% as at end-FY March 2012 (end-FY March 2011: 13.51%), before improving to 16.05% as at end-June 2012, comparing better to similar-rated peers’.
The Company’s capitalisation is deemed good, supported by a capital infusion in August 2011 which had resulted in its overall risk weighted capital adequacy ratio (“RWCAR”) improving to 17.05% as at end-FY March 2012 (end-FY March 2011: 12.46%), despite the expansion of its loan book. However, RWCAR dipped to 15.48% in 1Q FY Mar 2013 as CDB’s loan book grew; nevertheless capitalisation levels remained better than similar-rated peers’.