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Fitch Assign Mercantile Investments and Finance 'BBB-(lka)' Rating
November 16, 2015 / 2:16 PM / 2 years ago

Fitch Assign Mercantile Investments and Finance 'BBB-(lka)' Rating

(The following statement was released by the rating agency) COLOMBO, November 16 (Fitch) Fitch Ratings Lanka has assigned Mercantile Investments and Finance PLC (MIF) a National Long-Term Rating of 'BBB-(lka)'. The Outlook is Stable. The agency has also assigned the company's outstanding senior unsecured debentures a National Long-Term Rating of 'BBB-(lka)'. KEY RATING DRIVERS NATIONAL RATINGS MIF's rating reflects its modest franchise stemming from its long operating history, satisfactory capitalisation and loan-book exposure to less risky customer segments relative to peers. However, its ratings also capture its high risk appetite, which is evident in its substantial exposure to equity investments, low profitability metrics relative to peers and greater reliance on concentrated and short-term funding. Equity investments accounted for 16.8% of total assets at the end of the financial year to March 2015 (FYE15), much higher than the level at similarly rated peers, leaving the company vulnerable to market risk. In addition, MIF is in breach of the regulator's rule that limits equity investments to 25% of capital funds for non-bank financial institutions, with equity investments at 52.2% of capital funds at FYE15. MIF's ROA has declined to 1.9% at end-1HFY16 from 3.2% at FYE13 largely due to weak net interest margin (NIM) and high impairment charges relative to peers. Fitch believes that a potential increase in operating costs due to branch expansion and an increase in credit costs could hamper operating profitability and internal capital generation. Fitch views MIF's concentrated deposit base and high negative maturity mismatches as risks to its funding profile. Deposits are the main source of funding for MIF, but its deposit base is highly concentrated compared with similarly rated peers. MIF's negative mismatches of assets and liabilities of less than one year are higher than that for similarly rated peers. It amounted to 47% of equity at end-October 2015, 50% at FYE15 and 65% at FYE14. Unutilised credit lines covered 52% of the negative mismatches at end-October 2015. Funding lines sourced by MIF by pledging its assets could help to reduce such mismatches. MIFs regulatory Tier 1 capital adequacy ratio decreased to 19.6% at end-1HFY16 from 21.7% at FYE15 (FYE14: 22.5%). The loan book increased by 21% in FYE15 (FYE14: 17%), in line with the industry. Fitch expects a further dilution in capitalisation due to MIF's expanding operations, but believes that capitalisation should remain satisfactory for its current rating. Fitch believes that MIF's higher exposure to less risky assets, such as motor cars (40% of total advances at FYE15) has supported its asset quality. MIF's gross regulatory NPL ratio (FYE15: 4.2%) has historically remained below that of the industry. MIF's outstanding senior debentures are rated at the same level as MIF's National Long-Term Rating, as the issue ranks equally with the obligations to the company's other senior unsecured creditors. The company was established in 1964, and is majority owned by the Ondaatjie family, who directly hold 57% of MIF's equity. At end-June 2015, MIF accounted for 3.3% of non-bank financial institution sector assets in Sri Lanka. MIF mainly provides vehicle financing through lease and hire purchase. RATING SENSITIVITIES NATIONAL RATINGS An upgrade of MIF's rating is contingent upon the company significantly reducing its exposure to equity investments, reducing high structural maturity mismatches and deposit concentrations, improving its core profitability and maintaining its capitalisation. A continued increase in MIF's large maturity mismatches and a sustained deterioration in its capitalisation and asset quality relative to its higher-rated peers could result in a downgrade. The senior debt rating will move in tandem with the MIF's ' National Long-Term Rating. Contact: Primary Analyst Dilranie Mudannayake Analyst +94 1 1254 1900 Fitch Ratings Lanka Limited Level 15-04, East Tower, World Trade Center Colombo 01, Sri Lanka Secondary Analyst Jeewanthi Malagala,CFA Analyst Committee Chairperson Sabine Bauer Senior Director +852 2263 9966 Media Relations: Bindu Menon, Mumbai, Tel: +91 22 4000 1727, Email: Note to editors: Fitch's National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated 'AAA' and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as 'AAA(lka)' for National ratings in Sri Lanka. Specific letter grades are not therefore internationally comparable. Additional information is available on Applicable Criteria Evaluating Corporate Governance (pub. 12 Dec 2012) here Global Non-Bank Financial Institutions Rating Criteria (pub. 28 Apr 2015) here National Scale Ratings Criteria (pub. 30 Oct 2013) here Additional Disclosures Solicitation Status here Endorsement Policy here ail=31 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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