(The following statement was released by the rating agency)
Nov 13 - itch Ratings Lanka has affirmed Sri Lanka's Senkadagala Finance PLC's (SFC)
National Long-Term Rating at 'BBB+(lka)' with a Stable outlook. The agency has simultaneously
affirmed the rating on SFC's outstanding senior unsecured redeemable debentures of LKR300m at
SFC's rating reflects its long operating history and good credit profile which has been
maintained through economic cycles, supported by sound credit controls, low refinancing risk and
high profitability. However, a negative factor for SFC's credit profile is its elevated
financial risk, as reflected in a reduction in its capitalisation during the financial year to
end-March 2012 (FY12) compared with historical norms. This is due to the absence of capital
injections to support SFC's high asset growth in FY12.
An upgrade of SFC's rating is contingent upon the company strengthening its franchise and
improving its capitalisation to levels commensurate with asset growth, while maintaining strong
asset quality and reasonable profitability. A continued weakening in SFC's capitalisation and/or
financial flexibility (indicated by a further reduction of unencumbered assets relative to
unsecured liabilities) over the next 12 months could lead to a downgrade.
Fitch believes SFC is likely to maintain its asset quality in line with peers despite a
slower economic environment in the next 12-18 months, supported by its prudent underwriting
policies and concerted recovery efforts. Asset quality improved during FY12 on the back of high
loan growth (64% in FY12) and a 16.5% reduction in the value of outstanding NPAs, amid a more
conducive economic environment. However a slowing macroeconomic environment in H1FY13 has led to
a 49% increase in advances in arrears between three and six months. This increase is in line
with peers and reflects cyclicality rather than a structural weakening.
The maturities of SFC's assets and liabilities are closely matched compared with peers,
reducing refinancing and liquidity risks to a large extent, achieved by way of on-balance-sheet
securitisations. However Fitch notes that over-reliance on such securitisations expose SFC to
greater funding volatility and could limit its ability to expand its lending franchise to the
level of unencumbered assets available on the balance sheet.
Fitch expects the slowing credit cycle and rising market interest rates to pressure SFC's
net interest margin and return on assets (ROA) over the 12 months to end-September 2013, as SFC
funded most of its fixed-rate lending portfolio with variable rate borrowings. However SFC's
level of interest rate risk is in line with industry norms. Profitability levels in terms of ROA
improved in H113 to 5.6%, mainly supported by lower credit costs coming off a more benign
economic environment and improving economies of scale as branches that were newly established in
the 12 months to FYE12 break even.
SFC was established in 1968 and accounted for approximately of 3% of licensed finance
companies' assets in Sri Lanka at December 2011. It operates through a network of 46 outlets and
a majority of the shareholding is held by members of the Balasuriya family.