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Monday March 4th, 2024

Sri Lanka’s Asia Asset Finance rated ‘A+(lka)’ with a stable outlook: Fitch

ECONOMYNEXT – Fitch Ratings said it has assigned a First-Time Rating of ‘A+(lka)’ Outlook Stable to Asia Asset Finance.

“Fitch Ratings has assigned Sri Lanka-based Asia Asset Finance PLC a first-time National Long-Term Rating of ‘A+(lka)’ with a Stable outlook,” the rating agency said.

The full statement follows:

Fitch Assigns Asia Asset Finance a First-Time Rating of ‘A+(lka)’; Outlook Stable

Fitch Ratings – Colombo/Mumbai – 07 Feb 2024: Fitch Ratings has assigned Sri Lanka-based Asia Asset Finance PLC a first-time National Long-Term Rating of ‘A+(lka)’ with a Stable outlook.

Asia Asset Finance is a 72.9%-owned subsidiary of India-based Muthoot Finance Ltd (MFL,BB/Stable). Its core business is in gold-backed lending, similar to its parent. Asia Asset Finance has a small market share of 1.6% of total finance and leasing company (FLC) industry assets.

KEY RATING DRIVERS

Shareholder Support Drives Rating: Asia Asset Finance’s rating reflects our expectation that MFL will provide extraordinary support to its subsidiary if required. We believe MFL has the financial ability and incentive to provide support, given its majority shareholding, record of capital infusions and strategic and operational alignment in its subsidiary’s core product – gold-backed loans. This is counterbalanced by Asia Asset Finance’s small size and contribution to MFL, limited brand sharing and different operating jurisdiction.

Limited Role and Contribution: Asia Asset Finance’s rating is constrained by our view of its modest role and contribution within MFL group. This is based on its small size relative to its major shareholder, separate geographical market and regulatory framework, and performance that has been affected by Sri Lanka’s difficult operating conditions. We believe Asia Asset Finance plays a less significant role in MFL’s franchise relative to the parent’s other financing subsidiaries in India, which help to broaden MFL’s franchise in its home market.

Strategic Integration: Asia Asset Finance’s business model aligns with MFL’s core product of gold-backed loans, following its transition from vehicle financing and unsecured loans.
MFL has a clear influence on Asia Asset Finance’s business strategy and maintains oversight of execution at the board level. The shareholder also appoints three non-executive directors on Asia Asset Finance’s eight-member board and has seconded an employee to head its gold-loan internal audit team. Nonetheless, some differences remain due to the entities’ separate jurisdictions and local market practices.

Adequate Ordinary Capital Support: MFL has provided adequate and timely capital support to Asia Asset Finance since it acquired the company in 2014. It infused around LKR400 million in 2019 to support the subsidiary’s business growth. A further LKR413 million was infused in 2021 to meet the increased minimum regulatory capital requirement of LKR2.5 billion for Sri Lankan FLCs, ahead of the stipulated compliance deadline.

Weak Standalone Credit Profile: We consider Asia Asset Finance’s intrinsic credit strength to be significantly weaker than its support-driven rating. This stems from its modest domestic franchise, evolving risk practices, weak execution record and high debt/tangible equity ratio of 7.1x as at end-September 2023. The company’s delinquency ratio also exceeds the sector average, mainly due to significantly higher non-performing loans in its legacy non-gold loan book.

Stabilising Economic Outlook: We expect the operating environment for Sri Lankan FLCs to continue to stabilise following the inflation and interest rate shocks over the past two years. Easing inflation and interest rate pressures should provide steadier conditions for FLC sector performance. Some headwinds linger, as higher taxes will continue to weigh on household finances in 2024. Investor confidence will also take time to recover. Nonetheless, we expect the economic activity to improve in FY25 as GDP growth recovers.

Modest Franchise, Gold-Lending Niche: Asia Asset Finance is a small FLC with around 1.5% market share of industry loans and deposits. It has a niche in gold-backed lending and accounts for around 7% of sector gold loans. Asia Asset Finance derives some benefits from MFL’s domain knowledge in gold-backed lending. However, differences in regulatory frameworks and lending practices between Sri Lanka and India are likely to result in varied portfolio performance relative to MFL’s performance in India.

High Appetite for Gold Loans: Asia Asset Finance’s high gold-loan exposure heightens its market risk due to gold price fluctuations. We regard gold collateral as liquid in terms of recoverability, but this is counterbalanced by Asia Asset Finance’s aggressive risk appetite within the segment. For example, it has a history of elevated loan/value ratios and a high annualised gold-loan growth rate of 56% from FY18 to FY23. Asia Asset Finance plans to diversify into small-ticket mortgages and vehicle loans to ease its concentration risk, but this is subject to execution risk.

Significant Asset-Quality Risks: We expect Asia Asset Finance’s asset quality metrics to remain weak in the near term, as legacy delinquent loans take time to resolve. Some borrowers may also face residual financial pressure after the difficult economic conditions over the past few years. The company’s gold-backed portfolio should mitigate credit losses, due to the typically healthy recoverability of gold collateral, but this may be tested against its generous risk parameters and still challenging operating conditions.

Asia Asset Finance’s 90-day non-performing loan ratio of 24.7% stood above the industry’s 19.9% at end-September 2023, driven by its legacy portfolio.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

Asia Asset Finance’s rating is sensitive to changes in MFL’s credit profile as well as our opinion around MFL’s ability and propensity to extend timely extraordinary support. Developments that could lead to negative rating action include:

– Meaningful reduction in the parent’s ownership, control or influence that could weaken its propensity to support the subsidiary
– Notable decline in capital buffers, indicating reduced timeliness in financial support to back growth
– Weakening alignment of Asia Asset Finance’s gold loan practices with its parent’s policies, denoting a lower level of integration
– Sustained underperformance that increases the management and reputational burden for MFL
– Insufficient or delayed liquidity support from MFL that hinders Asia Asset Finance’s ability to meet its obligations in a timely manner

Such developments could significantly reduce shareholder support prospects and, if severe, may lead to the ratings being based off Asia Asset Finance’s standalone credit profile. This would imply a multi-notch downgrade.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

– A significantly greater strategic role for Asia Asset Finance within MFL group
– Closer integration with MFL across broader functional areas
– Greater sharing of the Muthoot brand name besides the gold-loan product

However, we view these developments as less likely in the near-term in light of Asia Asset Finance’s different operating jurisdiction and small size relative to MFL.

Date of Relevant Committee
01 February 2024

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
Rating of the entity is linked to its parent’s, MFL, rating.

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Sri Lanka central bank swaps top $3.2bn by December

ECONOMYNEXT – Sri Lanka’s central bank borrowed US dollars from various counterparties through swap transactions, which had topped 3.2 billion US dollars by December 2024, official data show.

The net short position, including swaps disclosed by the central bank, grew by over almost 1.28 billion US dollars from December 2022 to 3,280 million dollars.

The gross position grew from 2,263 million dollars to 3,280 million US dollars over the year.

The central bank supported some state banks with dollars to cover their dollar exposures, which had since been paid back.

By December reported gross reserves of the central bank was 4,491 million US dollars, against swaps of 3,280 billion US dollars.

Swaps of around 1500 related to the People Bank of China.

Swaps allow a central bank to increase gross reserves, without raising domestic interest rates.

Swaps with domestic counterparties lead to liquidity being injected into money markets, which can be mopped if domestic credit growth is moderate.

At the moment many private banks have large dollar positions invested outside the country, which cannot be used for transactions domestically because of a money monopoly given to macro-economists. (Sri Lanka repays debt or collects reserves of U$5bn via banking system since rate correction)

However unwinding swaps after private credit has picked, or engaging in swaps after private credit has picked up, may lead to money being injected to maintain the policy rate, leading to excess credit by banks and balance of payments deficits and or currency collapses, analysts say.

Central bank swaps in the third quarter of 2018 led to a collapse of the currency under the ‘exchange rate as the first line of defence’ policy peddled to Sri Lanka, critics have said earlier.

Domestic currency proceeds of swaps were the primary ammunition to bust East Asian currencies in 1997-98.

Any depreciation after the swap proceeds have been used for imports (effectively mis-targeting rates) a central bank will run a forex loss.

The PBOC however had put a rule, preventing the use of the swap after gross reserves fell below 3 – months of imports, preventing Sri Lanka from getting into further trouble through the use of official reserves for private imports.

Sri Lanka’s central bank also used borrowings from the Reserve Bank of India, via the Asian Clearing Union to run BOP deficits.

Losses from exposed dollar positions of central banks which have gained ‘independence’ from fiscal rules and parliaments and engaged in macro-economic policy, including the Fed, have led to taxpayers bearing the losses in the end.

Swaps were invented by the Fed in the early 1960s, as it deployed macro-economic policy (printed money for growth) threatening its gold reserves and the Bretton Woods system.

Sri Lanka has other borrowings also, including from the IMF, which has made net foreign assets of the central bank negative. (Colombo/Mar05/2024)

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Sri Lanka loses MICE tourists to Thailand on minimum room rates

ECONOMYNEXT – Sri Lanka has lost Meetings, Incentive Travel and Exhibition travelers to competitors in East Asia and India due to minimum room rates as higher standard rooms were available in other countries at lower prices, industry officials said.

President of the Sri Lanka Association of Inbound Tourist (SLAITO) Nishad Wijetunga said they the industry managed to retain a majority of booking made before the minimum room rates were imposed by the state last year.

“However, there were MICE groups that were supposed to come and cancelled Sri Lanka and went to places like Thailand and other parts of India and we lost,” Wijetunga told EconomyNext.

“We know that large groups of MICE (tourists) are affected.”

India is a key source of MICE tourists to Sri Lanka.

Sri Lanka’s businesses have got used to protectionism and try to push up prices with import taxes to extract more money from customers using the coercive power of the state, with tiles and steel being among the most prominent examples.

RELATED: Stand-alone hotels unviable in Sri Lanka due to high construction, capital costs

High priced tiles and steel in turn makes hotels expensive to build and make the leisure industry less competitive, analysts say.

However, in tourism, unlike in building materials customers are not trapped within the country and are free to move to other markets.

Managing Director of CEC Events and Travels, Imran Hassan, said the industry lost groups to East Asia due to minimum room rate.

In one instance, an operator was in discussions to get a group of 900 passengers.

“And that moved out to Thailand,” Hassan said. “Like that, there are many instances that the minimum room rate was not conducive.”

Thailand in 2023 attracted 28.04 million tourists.

A group that used to come to Sri Lanka annually used to take 40 to 50 five-star hotel rooms. This time Sri Lanka competed by offering lower standard.

“This year, they’re only giving 10 rooms to the five-star hotels,” Hassan explained. “They are staying in smaller hotels because they can’t afford it because it has become so expensive.”

“But overall, we are working with the authorities to correct it.

“We don’t mind demand and supply situation taking the rates up as in the Maldives. But what we are saying is keep an open market.”

RELATED : Sri Lanka should say good bye to minimum room rates: President

President Ranil Wickremesinghe has said Sri Lanka cannot progress with protectionism and the country has to learn to face competition. (Colombo/Mar04/2024)

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Sri Lanka coconut auction price up 4.7-pct

ECONOMYNEXT – Sri Lanka’s average coconut auction price rose 4.7 percent to was 73,962 per 1,000 nuts on February 29, data from the Coconut Development Authority shows.

The highest price was 79,600 rupees for 1,000 nuts up from 77,100 rupees a week ago, while the lowest was 67,000 up from 61,000 rupees.

A total of 411,631 coconuts were offered at the auction and 325,591 nuts were sold.

Wholesale prices were 95 to 105 rupees for small nuts and 110 to 120 rupees per large nut in the week to February 15, 2024.

Farmgate prices in Kurunegala were 70,000 to 75,000 rupees per 1,000 nuts up from 70,000 -72,000 per 1000 nuts a week ago.

Coconut oil was 570,000 to 590,000 rupees per metric ton from last week’s 580,000- 600,000.

Coconut shells were 28,000 to 29,000 rupees a metric ton up from last week’s 26,000-28,000. (Colombo/Mar01/2024)

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