Fitch Affirms Central Finance’s ‘A-(lka)’ National Rating, Removes RWN; Outlook Stable
Fitch Ratings – Colombo – 17 Oct 2023: Fitch Ratings has affirmed Central Finance Company PLC’s (CF) National Long-Term Rating of ‘A-(lka)’, and removed the rating from Rating Watch Negative. The Outlook is Stable.
KEY RATING DRIVERS
Standalone Profile Drives Rating: CF’s National Long-Term Rating reflects its franchise as one of the largest domestic finance and leasing companies (FLCs) in Sri Lanka with an established operating history, which helps support its overall business profile. The rating also reflects CF’s above-industry capitalisation, with better asset-quality and earnings performance despite recent economic pressures, which underpins its position as one of the highest-rated standalone FLCs in Fitch’s Sri Lankan coverage.
Less Severe Economic Risk: The removal of the RWN reflects our view that downside to the rating is less imminent following the completion of the local-currency portion of the sovereign’s domestic debt optimisation (DDO), which addresses one element of risk to sector funding and liquidity. The operating environment will remain weak in light of strained household finances and fragile investor confidence, but should stabilise on the gradual economic recovery with easing inflation and interest rates.
Reduced economic risk will temper the pressure on the sector’s operating performance and liquidity profile, although the pace of recovery may vary with individual entities’ business mix and franchise strengths. Fitch expects sector growth to remain weak with lingering asset-quality pressure in the financial year ending March 2024 (FY24), but this may improve in FY25 as the economy recovers. Declining interest rates should ease funding cost pressure but could hit asset yields for lenders with shorter asset-repricing cycles.
Established Vehicle Financier: CF is the fourth-largest FLC in Sri Lanka with 4%-5% share of sector deposits and gross loans in June 2023. Fitch expects CF to remain focused on vehicle financing, which comprised 88% of net loans at FYE23, by targeting retail customers through loans and leasing facilities for registered, second-hand vehicles. Its market share fell given its more conservative growth appetite amid the economic challenges relative to the average of other Fitch-rated FLCs, but we expect the company to expand and retain its franchise strength once the economy recovers.
Cautious Lending Appetite: CF has retained a cautious lending approach amid several economic shocks that weighed on vehicle financing demand, asset quality and sector funding and liquidity in recent years. Its loans contracted by an average of 13% a year over FY19-FY23, compared with the industry CAGR of 1%. The company has also generally avoided riskier or less-familiar products.
Easing Asset–Quality Pressures: Enhanced recovery efforts led to CF’s 90-day past due ratio falling to be one of the lowest relative to the sector average of 20.4% at end-June 2023. The 1QFY24 non-performing loan ratio is also at the lower end of rated peers’, although we believe asset quality may remain susceptible to the weak economic conditions. The company maintains a reasonable buffer against credit losses as reflected in a loan-loss coverage ratio of nearly 100%, while its loan book is mostly secured.
