Key Rating Drivers
The rating reflects implied support from its main shareholder, state-owned People's Bank (PB; AA+(lka)/Stable), if required. PB has a 36% effective shareholding in PMF, directly and via PB's subsidiary People's Leasing Finance PLC (AA-(lka)/Stable). Fitch's view of support is also based on PMF's association with, and consequent reputational risk to, PB's franchise given the common brand identity, PB's representation on PMF's board and past demonstrated support in the form of borrowings and equity injections. PB continues to be a key creditor to PMF, accounting for 41% of its total borrowings at the financial year end-March 2013.
PMF obtained a licensed finance company (LFC) license that allows mobilisation of retail deposits in April 2012, prior to which much of its funding was from wholesale sources. Deposits accounted for LKR2.3bn at FYE13 (57% of total assets). This included new deposits mobilised by mainly leveraging the PB brand as well as conversions of promissory notes.
Profitability as measured by return on assets (ROA) deteriorated to negative 2.5% in FY13 (FY12: 0.6%), mainly due to increasing operating costs to support growth in the wake of obtaining the new LFC license. Operating expenses (excluding provisions) to total income increased to 107.3% (FYE12: 60%).
If the current economic downturn persists, there is a risk current three-month loan arrears will accelerate into the over six-month category unless strong monitoring and control measures are maintained. PMF's non-performing loans (NPLs) of over three months rose to 25.2% at FYE13 (FYE12:17.9%), as a significant number of performing loans turned into three-month arrears. However PMF's NPLs of over six months improved to 11.9% at FYE13 (FYE12:14.2%), due to rapid loan growth.
PMF's liquidity pressure remains intense as unutilised credit lines were insufficient to cover maturity mismatches between assets and liabilities.
Total liquid assets accounted for 10.5% of deposits at FYE13, marginally above the statutory liquidity ratio of 10% for LFCs. However, Fitch expects adequate liquidity support from PB would be forthcoming should it be required.
PMF's capitalisation measured by equity to total assets fell to 20.3% at FYE13 (FYE12: 31.6%) largely due to accumulated losses and increase in assets stemming mainly from the loan book. A further dilution in capitalisation is likely along with the expansion of the loan book, 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 may result in a weaker standalone credit profile.
PMF's rating may be downgraded if there is any change to PB's ability or propensity to extend support. This may stem from a change to PB's National Long-Term Rating or a material weakening of linkages with PB, such as a dilution of PB's effective shareholding or board control.
PMF's asset base accounted for 0.8% of LFC sector assets at end- December 2012. PMF mainly provides vehicle finance, in the form of lease and hire purchase (76% of the loan book at FYE13).