Fitch Ratings Lanka has assigned Sri Lanka-based Bimputh Finance PLC (Bimputh) a National Long-Term Rating of ‘BB(lka)’ with a Stable Outlook.
KEY RATING DRIVERS
Bimputh’s rating reflects its developing franchise and limited track record as a recent entrant to the non-bank financial institution sector in Sri Lanka. The rating also captures its relatively high risk appetite, which is evident from the dominance of micro-financing in its exposures; limited funding diversity with high dependency on wholesale funding; and pressure on capitalisation through above-average loan growth.
These are counterbalanced by wide net interest margins (NIMs). About 78% of Bimputh’s loan book is from the microfinance segment, which is seen by Fitch as riskier in nature due to the greater susceptibility of this segment to economic cycles. The company’s gross NPL ratio for loans that are six or more months past due stood at 0.96% at endJune 2015.
Fitch believes that the ratio is higher at 3.2% if a facility to Sevanagala Sugar Industries Limited (an entity within the Daya Group, which was expropriated by the government in November 2011) is included, but the ratio is in line with similarly rated peers. The company has adequate risk controls in place, including through product structuring, regular collections of dues and close interaction with the borrowers.
However, Fitch believes that the aggressive expansion of the company’s loan book raises the likelihood of asset-quality deterioration, particularly if the related risks are not well managed. The company’s deposit franchise remains weaker than that of its peers and remains highly concentrated.
Bimputh’s loan-to-deposit ratio increased sharply on account of rapid loan growth to 289% at end-June 2015 from 184% at end-March 2014 with the company’s loan book being increasingly funded by borrowings. The company’s loan book expanded by 31% in April-June 2015 from the same period a year earlier and 213% in the financial year ended March 2015 (FY15), Bimputh’s Tier 1 regulatory capital ratio declined to 21.6% at end-June 2015 from 23.8% at endMarch 2015 due to the expansion of the loan book.
Fitch believes that continued high capital consumption could lead to further deterioration in capital ratios, if internal capital generation proves insufficient or if there is no capital injection. The company’s ROA is better than that for similarly rated peers at 9.8% (annualised) in 1QFY16 (FY15: 4.7%), driven by wider NIMs through its focus on micro-lending.
However, Fitch believes higher operating costs due to branch expansion and a potential increase in credit costs could hamper profitability. Bimputh is 94% held by its founders, the Gamage family. The company started operations in 2007, and in 2012 acquired the micro-finance portfolio of Lisvin Investments.
Since then assets have increased over seven times to LKR6.3bn at end-June 2015. Bimputh accounted for just 0.96% of total assets for the licensed finance companies (LFC) sector at end-June 2015 (March 2015: 0.74%).
The strengthening of Bimputh’s franchise, while sustaining credit metrics similar to higher rated peers and moderating its risk appetite could be positive for its rating. Higher risk appetite, indicated through aggressive loan growth that could increase capital impairment risks, either through greater unprovided NPLs and/or a continued deterioration in capitalisation, could lead to a downgrade of Bimputh’s ratings.