Rating Action Rationale
SLFL's ratings reflect Fitch's view that support would be forthcoming from its parent, Sampath Bank PLC (AA-(lka)/Stable), if needed under extreme circumstances, given the strategic importance of SLFL to SB. This view is premised on SB's 100% ownership of SLFL, the sharing of a common brand, the strategic involvement of the bank's management on SLFL's board, and the consequent reputation risk to the bank should SLFL fail. SB has also injected equity into SLFL when required, the latest being a LKR300m injection in 2009.
Rating Drivers and Sensitivities
SLFL's rating may be downgraded if there is any change to SB's ability or propensity to extend support. This may stem from a change to SB's National Long-Term Rating or a material weakening of linkages with SB, such as a dilution of SB's majority ownership or greatly reduced strategic involvement in SLFL. Conversely, SLFL may be upgraded if there is a significant increase in SLFL's strategic importance to SB, as indicated by a higher share of the group's profits or leasing business, or closer operational integration, while remaining majority-owned by SB.
SB is involved in SLFL at a strategic level, with seven out of SLFL's nine board seats being held by current or former senior SB officials and directors. This includes the bank's CEO on an ex-officio basis, its CFO and its Chief Risk Officer. SB has also guaranteed (mostly on commercial terms) and directly granted a majority of SLFL's borrowings at end-2012. The proportion of borrowings from the parent may reduce as SLFL grows in size and seeks funding from other sources but this will not result in negative rating action. In 2012, SLFL accounted for 59% of SB's consolidated net lease portfolio growth.
SLFL's portfolio expanded 40% in 2012, driven by vehicle financing in the form of lease and hire purchase (89% of advances). The remainder comprised mainly debt-factoring receivables. The company has also started gold-backed lending (pawning) this year. SLFL reports stronger asset quality compared with peers, with non-performing advances (NPA) in arrears for over six months declining to 1.6% in 2012 (2011: 2.4%), while NPAs in arrears for over three months remained below 4%. Fitch expects SLFL's asset quality to weaken somewhat in 2013 due to macroeconomic pressures. However, SLFL's asset quality is likely to compare favourably with that of similarly sized peers, due to stringent credit underwriting and close monitoring.
SLFL's profitability, as measured by return on assets (ROA), fell to 4.04% in 2012 (2011: 6.7%), as net interest margin narrowed due to high cost of funding. However, the negative impact on ROA was offset to an extent by improving economies of scale, where operating costs to average assets fell to 4.9% in 2012 (2011: 6%). Fitch expects ROA to remain under pressure in 2013, in line with the sector, due to intense competition and an economic slowdown.
SLFL's capitalisation declined in 2012 on the back of strong growth. Equity to total assets eased to 15.1% at end-2012 from 16.9% at end-2011. A further dilution in capitalisation is likely in 2013 given continued aggressive growth targets, in the absence of a capital injection. The continued dilution in capitalisation will expose the company to greater earnings volatility, and reduce its ability to absorb credit losses if they accrue, and will result in a weaker standalone credit profile.
SLFL has strong access to domestic bank funding compared relative to similarly sized peers, which Fitch believes is largely on account of its linkages with SB. The company has maturity mismatches between its assets and liabilities, with liabilities falling due earlier than assets, in
line with the sector. However, this is mitigated by unutilised credit lines from banks providing adequate cover of SLFL's short-term maturity gap as at end-2012.
SLFL is a specialised leasing company which accounted for 3% of the sector's assets at end- December 2011.
The latest research on SLFL is available on www.fitchratings.com and www.fitchratings.lk.