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Saturday October 23rd, 2021
Business

Sri Lanka’s Softlogic Stock Brokers get [SL]BBB rating from ICRA

ECONOMYNEXT – Sri Lanka’s Softlogic Stock Brokers (Pvt) Limited has been given a [SL]BBB domestic rating by ICRA Lanka.

The rating took into account that the stock broker’s parent was Softlogic Capital Plc, rated [SL]BBB+ and it had a client base among high net worth individuals and foreign investors.

It had a risk-weighted capital adequacy ratio of 310 percent as of March-21, remaining well above the regulatory minimum of 120 percent.

“The rating remains constrained by the Company’s moderate profitability with an average net margin [1]of 0.19 percent during the four years until FY2020,” the rating agency said.

“ICRA Lanka also takes cognizance of the inherent volatility in the Company’s primary business and the high competitive intensity in the industry.

“ICRA Lanka notes that the ceded market share in FY2021, despite recording higher volumes during the same period, primarily owing to the high competition in the retail segment.”

The full statement is reproduced below:

Rating action

ICRA Lanka Limited has assigned the issuer rating of [SL]BBB (Pronounced S L triple B) with a Stable outlook
for Softlogic Stock Brokers (Pvt) Limited (SSB or the Company).

Rationale

The rating takes into account SSB’s parentage by virtue of being a subsidiary of Softlogic Capital PLC, (rated
[SL]BBB+), its track record in equity broking and established position, strong franchise in key segments like
the High Network (HNW) and foreign institutions.

The rating also takes into account the Company’s adequate capitalization profile with a risk-weighted capital adequacy ratio of 310% as on Mar-21, remaining well above the regulatory minimum of 120%. ICRA Lanka also takes note of the comfortable debtor exposure levels of the Company.

The rating remains constrained by the Company’s moderate profitability with an average net margin 1of
0.19% during the four years until FY2020.

ICRA Lanka also takes cognizance of the inherent volatility in the Company’s primary business and the high competitive intensity in the industry.

ICRA Lanka notes that the ceded market share in FY2021, despite recording higher volumes during the same period, primarily owing to the high competition in the retail segment.

Outlook: Stable

ICRA Lanka believes SSB’s current capitalization profile, along with the anticipated support from Softlogic Capital PLC supports its medium-term growth plans.

The outlook may be revised to ‘Positive’ in case of
steady improvement in the capitalization profile and profitability of the Company.

The outlook may be revised to ‘Negative’ in case of a deterioration of earnings and capitalization levels.

Key rating drivers

Credit strengths
Part of the diversified conglomerate Softlogic Holdings, having access to managerial and capital support
from the group: Softlogic Stock Brokers (SSB) is a 100% owned subsidiary of Softlogic Capital PLC (rated
BBB+ On Watch by ICRA Lanka), which in turn is a subsidiary of Softlogic Holdings PLC (rated BBB Negative).

The Softlogic group is focused on four core sectors, retail, healthcare, financial services, and
ICT.

SCAP is the holding company of the group’s financial services segment.

ICRA Lanka expects equity broking to be of strategic importance to the group, as part of its broader financial services offering, which includes, life insurance, non-banking financial services, and asset management.

SSB has access to group managerial and capital support, management expertise, systems & controls, and shared services.

ICRA Lanka expects the parent company SCAP to support the necessary regulatory and growth capital for the
stock brokering entity if required.

Strong business franchise, especially among foreign and HNI clients: SSB is a prominent player in the Sri Lankan equity brokerage industry, with a strong franchise in the foreign and High Networth Individual (HNI) segments.

Over the period from FY2017 to FY2020, the Company enjoyed a leading position with a market share of around 8-14%. The Company’s market position however dropped in FY2021.

This was largely on account of its limited focus on the retail segment, which has been the driver for the sharp growth in overall industry turnover during this period, while the participation of the foreign segment (a key focus
area for the Company) has remained subdued.

Adequate capitalization profile, however, the ability to extend credit is somewhat capped by the capital availability:

Risk-adjusted capital adequacy ratio of SSB stood at 310% as in Mar-21 (230% in Mar-20), compared to the regulatory minimum of 120%. Also, the Company recorded a liquid capital of LKR 212Mn,
compared to the regulatory minimum of 35 Mn for licensed stock brokers. However, ICRA Lanka notes that the margin (client credit) exposures of the Company remain somewhat capped by the regulatory net capital position, which dictates the maximum debtor exposure by a stockbroker.

SSB’s margin/debtor exposure as in Mar-21 was 452 Mn, compared to the regulatory cap of LKR 506 Mn, which indicates a limited buffer.

The gearing ratio as in Mar-21 was 1.37x, where the same has increased from 0.55x from Mar-20, as the Company has taken on additional debt (Total debt increased from LKR 112 Mn to Mar-20 to
LKR 272 Mn in Mar-21) to fund its margin exposures.

Going forward, it will be crucial for SSB to improve its retail
franchise, as foreign participation in the market, at least in the short term, is expected to be subdued.

Credit challenges
Performance is highly cyclical depending on the overall market performance:

On average, about 85% of the total operating income of SSB is contributed by brokerage commission fees, thus the overall income and profitability are highly susceptible to the overall market performance.

ICRA Lanka notes that the overall profitability of SSB over the last 4 years until FY2021, has been quite modest, with an average net margin of 0.19% over the 4 years to FY2020.

However, during FY2021, the Company recorded a PAT of LKR 95 Mn
(Net margin of 22.77%) on the back of the strong post-COVID market rally during the second half of the financial year.

ICRA Lanka notes that the Company’s ability to diversify its revenue base is somewhat limited as the room for expansion of margin exposures is capped by regulatory norms and the Company
does not engage in proprietary trading or other M & A advisory work.

Higher competition affecting the overall market share of the Company: ICRA Lanka notes that SSB faces competition from broking houses that are part of well-established investment banking groups.

During FY2021, SSB’s limited traction in the retail segment resulted in the Company ceding market share to the
competition.

The rating takes note of the steps taken by the Company to better penetrate the retail market, via increasing brand awareness and introducing more retail-friendly digital trading solutions.

However, ICRA Lanka expects the competitive pressure to be high in the short to medium term, as foreign participation (which is a core segment of SSB) in the market is likely to be subdued.

About the Company

Softlogic Stock Brokers (Pvt) Limited (SSB) was incorporated in 2010 and is a prominent Stock Broker firm in Sri Lanka with a trading license from the Securities and Exchange Commission (SEC).
It is a fully-owned subsidiary of Softlogic Capital PLC, the holding company of the Softlogic group’s financial services
segment.

SSB has a key focus in High Networth and foreign customers, and enjoyed a leading market position over the last few years

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