Credit rating agency ICRA Lanka Limited (ICRA) has revised upwards the BBB+ credit rating outlook of Sri Lanka’s Asia Asset Finance Plc (AAF) from negative to stable.
“The outlook revision to “Stable” from “Negative” reflects the improvement of the parent entity’s rating and the additional support extended by the parent (Muthoot Finance, India). The outlook revision also factors in the increase in exposure to asset-backed lending, including gold loans,” the rating agency said in a statement.
During the 2019 financial year, Muthoot Finance had infused 470 million rupees via rights issue, thereby increasing its stake to 73 percent. Muthoot Finance had acquired a 30 percent stake in AAF in 2014 and increased its stake to 51 percent the following year.
The full statement is reproduced below:
ICRA Lanka Limited has reaffirmed the issuer rating of Asia Asset Finance PLC (AAF or the Company) at [SL]BBB+ (pronounced SL triple B plus). ICRA Lanka has also reaffirmed the issue rating of [SL]A-(SO) (pronounced SL A minus Structured Obligation) assigned for the one billion asset-backed secured debenture programme of AAF. The letters SO in parenthesis suffixed to a rating symbol stand for Structured Obligations. The SO rating is specific to the rated issue, its terms, and its structure. The SO rating does not represent ICRA Lanka’s opinion on the general credit quality of the issuer concerned. The outlook on the long term rating is revised to Stable from Negative.
The rating factor in the operational, financial and managerial support which AAF derives from being a 73 percent owned subsidiary company of Muthoot Finance Limited (MFL or the parent) rated by ICRA Limited of India at [ICRA]AA+ (Stable).
ICRA Lanka notes that, while the capital adequacy ratios remain adequate, buffer over minimum capital requirement (set by the CBSL) remains modest. AAF reported tangible net worth (adjusted for revaluation reserves and deferred tax gains) of 1,991 million rupees and reported net worth of 2,189 million rupees respectively as of Dec-20, which was close to the minimum regulatory core capital requirement of two billion rupees by January 2021.
Further, the Company is required to have a minimum core capital requirement of 2.5 billion rupees by January 2022, which is likely to be met through internal generation and capital infusion by the parent company. The ratings take into account MFL’s consent to provide capital support in the future as well as to meet the growth and regulatory requirement.
The credit strengths are, however, partly offset by the sustained deterioration of AAF’s asset quality indicators, with a high gross NPA ratio of 21.17 percent in Dec-20, in comparison to 16.21 percent in Mar-20 and 9.20 percent in Mar-19, mainly on account of higher slippages in the micro and SME related lending.
ICRA Lanka is cognizant of the challenging macro-economic conditions that prevailed during the period, particularly affecting SMEs and other weaker segments of the economy. The ratings, however, factor the increasing exposure to asset-backed products such as gold loans and leasing, from unsecured products such as microfinance and SME lending; exposure to asset-backed lending has increased to about 75 percent as in Dec-20, compared to 63 percent in Mar-19 and 48 percent in Mar-18. The ratings also take cognizance of moderation in overall profitability, mainly on account of lending margin compression.
The outlook revision to “Stable” from “Negative” reflects the improvement of the parent entity’s rating and the additional support extended by the parent. The outlook revision also factors in the increase in exposure to asset-backed lending, including gold loans. The outlook may be revised to “Negative” in case of further deterioration in AAF’s asset quality indicators, weakening profitability and also, in case of lower than expected support from MFL. The outlook may be revised to “Positive” in case of improvement in capitalization and asset quality indicators of the Company.
-Key Rating Drivers: Credit Strengths-
Operational, managerial and financial support from the parent: AAF is a 73 percent owned subsidiary of MFL, which has demonstrated a track record of providing both financial and operational support to AAF over the past few years. In FY2019, MFL infused about 470 million rupees via rights issue; which increased its stake to 73 percent.
Furthermore, ICRA Lanka notes the initiatives taken by the parent to infuse fresh capital in the near term. MFL is represented by three board members on the nine-member board. Operationally, MFL also provides support in staff training, internal controls, and internal audit functions. Going forward, timely support from the parent company, to meet future regulatory and growth capital requirements, will be crucial, from a rating point of view.
Increasing exposure to asset-backed lending: As of December 2020, AAF reported a gross portfolio of 13,308 million rupees vis-à-vis 13,871 million rupees in March-20 and 12,586 million rupees in March-19. ICRA Lanka notes that, over the last three years, the Company has shifted its exposures towards asset-backed lending, with gold loans being the key asset class; and the Company has discontinued its clean lending products typically with high asset quality risks such as micro-finance and working capital financing.
Exposure to asset-backed lending has increased to about 75 percent as in Dec-20, compared to 63 percent in Mar-19 and 48 percent in Mar-18. In Dec-20, gold loans accounted for about 40 percent of the total portfolio with an average loan to value (LTV) ratio of about 70 percent on gold loans.
The management intends to further increase its gold loan exposure over the medium term. ICRA Lanka takes cognizance of the relatively low credit risk and higher liquidity of these gold loans while taking note of the vulnerability to market risk stemming from gold price fluctuations.
Adequate capitalisation ratios, while buffer over core minimum capital may remain modest: As in December 2020, AAF had a total reported net worth of 2.19 billion rupees (1.99 billion rupees adjusted for deferred tax), which puts the NBFI close to the minimum capital requirement of 2 billion rupees as of January 2021. However, ICRA Lanka notes that internal generation remains modest with additional core capital required to meet the January 2022 capital target of 2.5 billion rupees set by the CBSL; but capital support, from the parent company, is expected to be forthcoming.
The parent entity aims to provide a capital infusion of 500 million rupees in Q1 of FY2022 followed by another capital infusion of 300 million rupees within the next year. From a risk-weighted capital adequacy point of view, AAF remained comfortable, where the core CAR and total CAR stood at 16.5 percent, as in December 2020 against the regulatory minimum of 6.5 percent and 10.5 percent, respectively.
The steady reduction in dependence on deposits supports liquidity profile: AAF has a fairly diversified funding profile comprising of retail fixed deposits, debentures, term loans from banks, and securitised borrowings.
The funds from fixed deposits have moderated over the years with 50 percent of the funding base consisting of fixed deposits as in Dec-20 in comparison to 52 percent in Mar-20, 57 percent in Mar-19 and 85 percent on Mar-18.
Going forward, with the expected expansion in the gold loan portfolio, AAF expects to further reduce the dependency on public funds and improve the long-term funding sources such as securitisation. Gearing has remained fairly constant with 5.90 times reported in Dec-20 in comparison to 5.86 times in Mar-20 and 5.93 times in Mar-19.
Weak asset quality indicators, however the portfolio shift towards secure asset-backed lending provides some comfort: AAF witnessed deteriorating asset quality indicators from Q1FY20 in line with the industry trend. The GNPA ratio increased to 21.17 percent in Dec-20 in comparison to 16.21 percent in Mar-20 and 9.20 percent in Mar-19.
ICRA Lanka notes that close to 70 percent of total GNPAs of the Company are from the discontinued clean lending portfolio, as SME and micro-segments were significantly affected since April 2019. In addition, ICRA Lanka notes that the bulk of these non-performing clean lending facilities are fully provided for, thus the GNPA adjusted for these fully provided facilities would be around 13 percent as in Dec-20.
Going forward, ICRA Lanka envisages the GNPA ratios to improve mainly due to the portfolio shift towards relatively better asset quality segments, such as Gold loans and the discontinuation of unsecured lending. The Net NPA ratio of AAF has moderated over the years as a result of the moderation in the provision coverage.
The Net NPA ratio moderated to 6.75 percent in Dec-20 from 6.65 percent in Mar-20 and 0.90 percent in Mar-19. The provision coverage has reduced due to the increased portfolio of the gold loans which require lower provisioning. The Company’s ability to arrest incremental slippages and improve overall asset quality will remain a key monitorable, going forward.
Margins likely to remain moderated driven by an increased focus on asset-backed lending: With the portfolio being shifted away from unsecured lending to asset-backed products such as gold loans, the lending margins have moderated over the years and is likely to remain moderate in the near term. Furthermore, the sharp decline in the systemic interest rates has also affected AAF’s yields. As a result, the Company witnessed a decline in annualised NIMs to 6.06 percent in Dec-20 compared to 9.22 percent in Mar-20 and 10.08 percent in Mar-19.
The credit cost (loan provisioning/average total assets – ATA) was 2.63 percent for FY2020 vis-à-vis 2.79 percent in FY2019; for the 9MFY21, AAF reported a credit cost of 2.39%. The credit cost slightly moderated on account of the expansion in the gold loan portfolio which requires lower provisioning.
During the 9M ended Dec-20 the cost to income ratio has moderated to 65 percent, from about 68 – 70 percent in the previous years. Going forward, it is crucial for the Company to manage its operating and credit costs, as room for lending margin expansion will be limited. ROA (PAT/ ATA) has also moderated to 0.15 percent in 9MFY2021, compared to 0.48 percent in FY2020 and 0.79 percent in FY2019.
-About the Company-
Asia Asset Finance PLC is a registered finance company set up in 1970 as a “Finance and Land Sales Company”. In 2004, Asia Capital PLC (ACP) acquired AAF. In August 2014, MFL acquired about 30 percent of the Company and in December 2014, MFL increased its stake up to 51 percent. During FY2020, MFL has further increased its stake to about 73 percent via a rights issue.
AAF offers gold loans, SME loans, vehicle finance (2 wheelers, 3 wheelers, cars & vans etc.), loan against property, fixed deposits and other personal credit facilities.
During FY2020, AAF reported a profit after tax of 70 million rupees on an asset base of 15.16 billion rupees, as compared with a profit of 101 million rupees on a total asset base of 13.9 billion rupees in the previous financial year. During nine months ended December 2020, AAF reported a profit after tax of 18 million rupees on an asset base of 15.32 billion rupees, as compared to a profit of 91 million rupees, a year earlier.
(COLOMBO, 11 May 2021)