(The following statement was released by the rating agency)
Jan 22 - Fitch Ratings Lanka has revised Vallibel Finance Plc's (VFL) Outlook to Negative from Stable. At the same time, the agency has affirmed VFL's National Long-Term rating at 'BB-(lka)'.
The revision of the Outlook reflects VFL's declining capitalisation, as measured by its equity/assets ratio, and the deterioration in its asset quality indicators as a result of rapid lending. The rating may be downgraded if VFL is unable to stem the decline in these metrics, resulting in a significant shift in its financial profile away from similarly rated peers. The Outlook may be revised to Stable if VFL is able to curtail the increase in its non-performing loans (NPLs) through improved portfolio monitoring, supported by new IT systems, and if core capitalisation strengthens alongside slower loan expansion.
VFL's rating reflects its small but expanding asset base, its moderate profitability and a developing franchise.
VFL's portfolio expanded strongly (79% in the financial year to March 2012), driven by lower import duties on vehicles and by branch expansion. Consequently, its equity/assets ratio fell to 9.6% at end-H113 (FYE12:10.3%; FYE11:12%). Loan growth slowed to 16% in H113 due to a reduction in credit demand and an increase in import duties on vehicles after 31 March 2012.
VFL's asset quality weakened, particularly for loans that are three months overdue, with its gross NPL ratio rising to 14.1% at end-H113 (FYE12: 8.2%) due to the seasoning of its loan portfolio. Consequently, its net three-month NPLs/equity ratio nearly doubled to 112.3% during the same period. VFL's gross NPL ratio for loans that are six months overdue also weakened to 2.4% from 1.7% during this period. Its net six-month NPLs/equity ratio rose to 8.4% at end-H113 from 5.3% at FYE12.
VFL's pre-tax return on assets (ROA) fell to 6% (annualised) in H113 (FY12: 7.5%) due to reduced net interest margins (NIM) and higher provisioning costs. NIM contracted in H113, as VFL's cost of funds increased due to rising market interest rates. Given intense competition for deposits, controlling funding costs will be a challenge for VFL.
Deposits increased 24.5% in H113, outpacing lending growth. This caused VFL's net loans/deposits ratio to improve to 138.9% at end-H113 (FY12: 149.2%). Customer deposits, the primary source of funding for VFL, accounted for 60% of total assets at end-H113. The company had issued LKR375m unsecured subordinated redeemable debentures during FY12 and in H113 to strengthen its tier 2 capital base and to support lending. The issue was subscribed in full by an entity related to its largest shareholder.
VFL is a LFC 72.87% held by Vallibel Investments (Pvt) Limited, an investment company owned by high-net-worth businessman K.D.D Perera. It operates through 11 outlets and accounted for 1.7% of LFC sector assets at end-December 2011.