Sri Lanka First Capital Treasuries rated [SL]A-, profits seen moderate

ECONOMYNEXT – ICRA Lanka has rated First Capital Treasuries Limited [SL]A- with stable outlook saying the Sri Lankan primary dealer’s profitability this year is likely to moderate as trading gains could be lower than in FY2015.

ICRA Lanka has also assigned the [SL]BBB+ rating with stable outlook to the 500 million rupees of subordinated unsecured redeemable debentures of First Capital Treasuries Limited (FCTL).

“The rating takes note of the improvement in the financial performance of the company during FY2015, due to the favourable interest rate scenario, which resulted in trading gains,” the rating agency said.

But it said these gains are “likely to moderate in the current financial year as the market interest rates are likely to remain largely range-bound or move upwards.”

FCTL’s profits are likely to be susceptible to unfavourable interest rate movements, especially if they occur within a short time span, the rating agency said.

The ratings factor in FCTL’s position as an established standalone primary dealer with a long track record, established franchise and clientele.

“The rating also factors in the prudent internal control and processes, along with the adequate risk management systems put in place, which is commensurate in relation to the risks intrinsic to a primary dealer’s business.”

The ratings also factor in FCTL’s comfortable liquidity position due to the liquid nature of the portfolio of Treasury bills and bonds, which are highly liquid assets, and availability of sanctioned bank facilities.

ICRA Lanka notes that while the portfolio of the company has minimal credit risk, it however is susceptible to adverse movements in the interest rates.

ICRA Lanka said FCTL’s regulatory capital adequacy is comfortable at 21.8 percent as in March 2015 vis a vis the regulatory requirement of 8 percent.

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“However FCTL’s gearing has generally been higher than the industry average and, stood at about 10.2 times in March 2015 (5.9 times in June 2015),”  ICRA Lanka said.

“The company’s regulatory capitalization is comfortable to absorb the losses, if any, on the current portfolio due to unfavorable interest rate movements.”
 
ICRA Lanka also noted that there is scope for FCTL in improving its effective participation in the primary market as trading gains in FY2015 were largely from the secondary market transactions.

“Further, the ratings take cognisance and would closely monitor the developments on the outstanding contingent liabilities (tax demands), which stood at about 20 percent of the net-worth as in March 2015.”

FCTL’s portfolio which stood at about 16 billion rupees in March 2015, reduced to about 10 billion in June 2015 as the company brought down its holdings as the interest rate scenario is likely to remain largely range-bound or move upwards, the rating agency said.

FCTL is exposed to the counter party risks on its reverse repo exposures which were largely concentrated to about 7-8 entities as in March 2015.

“The company however closely monitors its exposures and takes proactive measures to mitigate the impact of the above mentioned risks,” ICRA Lanka said.

It however noted that FCTL has an established clientele and had undertaken transactions with more than 50 entities during the year apart from the retail participants.

The company also has access to over 2,500 clients of its parent, First Capital Holdings, and its subsidiaries.

During FY2015, the company’s overall profitability improved as trading income increased sharply from 227 million rupees in FY2014 to 900 million rupees while interest income remained largely stable, the rating agency said.

During FY2015, FCTL reported a net profit of 730 million rupees on a total asset base of 16,096 million rupees vis a vis a net profit of 518 million rupees on a total asset base of 12,552 million rupees.

In the three months ended June 2015, the company reported a net profit of 107 million rupees on a total asset base of 10,630 million rupees. (Colombo/September 15 2015)
 

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