ECONOMYNEXT – Profit margins of Sri Lankan finance companies are likely to dip with rising interest rates and restrictions of vehicle leasing, First Capital Equities has said in a research report.
The stock broker expects the finance sector to face “moderately tough conditions” to operate with thinning margins and new LTV (loan to value) regulations leading to slower and previous but moderate credit growth.
“Despite slow economic conditions, the rise in non-performing loans (NPLs) are likely to be slow amidst price appreciation in vehicle prices as bulk of the lending is attached to vehicles,” the report said.
“We believe the larger finance companies have an advantage with lower cost of funding and large conversion levels from leases to loans which improves re-pricing abilities at times of rising interest rates.”
First Capital said finance company profit margins are expected to dip but credit growth should remain moderate.
“With rising interest rates and bulk of the lending attached to leases, the finance sector is likely to experience a dip in margins while credit growth is expected to remain moderate around 16-18% despite deceleration from 2016,” it said.
“New LTV regulations also likely support the slower credit in 2017E.”
First Capital said that strong second-hand market vehicle prices will support lower bad loan provisions.
“Despite rising interest rates and slower economic conditions, FC Research expects NPL provisions of finance companies to continue to stay on the back significant price appreciations in the second hand vehicle market,” the report said.
“Higher vehicle prices are likely to deter related borrowers from default while even if defaulted, higher vehicles prices ensures finance companies of eliminating losses and recovering bad debts.”
(COLOMBO, April 3, 2017)