Fitch Affirms People’s Leasing & Finance at ‘A+(lka)’; Outlook Stable
Fitch Ratings – Colombo – 01 Sep 2021: Fitch Ratings has affirmed People’s Leasing & Finance PLC’s (PLC) National Long-Term Rating at ‘A+(lka)’ with a Stable Outlook. At the same time, Fitch has affirmed the National Long-Term Rating of PLC’s senior unsecured debentures at ‘A+(lka)’.
|People’s Leasing & Finance PLC||Natl LT A+(lka)||Affirmed||A+(lka)|
|senior unsecured||Natl LT A+(lka)||Affirmed||A+(lka)|
KEY RATING DRIVERS
PLC’s National Long-Term Rating is driven by its standalone profile. It reflects its established franchise as one of Sri Lanka’s largest finance and leasing companies (FLC), with a market share of 12% of total FLC-sector assets at end-March 2021, benefiting from links to its 75% parent, state-held People’s Bank (Sri Lanka) (AA-(lka)/Stable). PLC’s rating also captures its risk appetite, influenced by its exposure to customer segments that are more susceptible to operating conditions.
Sri Lanka’s operating environment remains challenging. The country’s real GDP contracted by 3.6% in 2020 due to the disruption stemming from the coronavirus pandemic. We forecast an economic rebound in 2021 and 2022, but this depends on the evolution of the pandemic. Our assessment of the operating environment for Sri Lankan FLCs also incorporates the prolonged restrictions on motor-vehicle imports, with vehicle financing being the core business of FLCs.
We expect asset-quality risk to persist for PLC in the near- to-medium term, in light of the difficult operating conditions. PLC’s reported regulatory gross non-performing loan ratio, based on six-month arrears, remained elevated at 9.2% in the financial year ended March 2021 (FY21) (FY20: 9.1%), but was below the 11.3% sector average. Impaired loans, based on Stage 3 loans (loans that are 90 days past due), were also high, at 21.0% in 1QFY22 (FY20: 20.4%). PLC has sought to mitigate the impact on asset quality by increased its focus on financing asset exposures that are seen to be less dependent on economic conditions relative to its traditional exposure to commercial vehicles. Loan loss allowance coverage of impaired loans increased to 35.0% in 1QFY22 and 31.3% in FYE21 (FY20: 27.6%) and includes additional provisions via management overlays.
PLC’s earnings and profitability could improve, but remain pressured in the near-term due to still-high credit costs. This is despite a possible improvement in income generation. Pre-tax net income/average assets rose to 5.0% in FY21, from 4.2% in FY20, before falling to 1.1% in 1QFY22, alongside impairment charges, which consumed 76.5% of pre-impairment operating profit.
Our expectation is for leverage to remain comfortable in the near- to medium-term alongside the potential expansion. The sustained improvement in the company’s leverage, measured through debt/tangible equity, to 3.1x in 1QFY22, from 4.0x in FYE20, stemmed from a balance-sheet contraction, which provided some buffer for loss absorption. Tier I and total capital adequacy ratios improved to 17.7% and 18.6%, respectively, in FY21 (FY20: 15.1% and 16.0%) and remained above the minimum requirements and the sector’s 13.6%.
PLC’s financial flexibility, as reflected in a larger share of unsecured debt/total debt than peers, is supported by its high share of deposits. Deposits remain its main source funding. We do not envisage a significant shift in its funding mix in the medium-term, even if loan growth resumes. PLC’s funding and liquidity profile relative to peers benefits from its linkages to its parent, People’s Bank (Sri Lanka), which supports the stability of its deposit base and enhances its funding access.
We regard PLC’s risk appetite as comparable with that of similarly rated FLC peers. Its business model is centred on vehicle financing, with leases and motor loans accounting for about 75% of gross loans at FYE21; as such, dependence on collateral is high. Gross loans continued to contract through 1QFY22 and FY21, reflecting the combined effect of pandemic-related lockdowns and limited appetite for loan expansion. Prospects for loan expansion could be supported through our forecast economic expansion, but could nonetheless remain muted.
PLC’s senior unsecured debt is rated at the same level as its National Long-Term Rating, as it ranks equally with claims of the company’s other senior unsecured creditors.