General
Sri Lanka official remittances up 16.8-pct in Feb
ECONOMYNEXT – Fitch Ratings said it has affirmed Singer Finance (Lanka) Plc’s (SFL) National Long-Term Rating of ‘BBB(lka)’. The outlook is stable.
Fitch also affirmed SFL’s outstanding senior unsecured debt at ‘BBB(lka)’ and outstanding subordinated
unsecured debentures at ‘BB+(lka)’.
“SFL’s rating is based on our expectation of support from its parent, consumer-durable retailer, Singer (Sri Lanka) PLC (Singer, A(lka)/Stable),” the rating agency said.
The full statement follows:
Fitch Ratings – Mumbai/Colombo – 07 Mar 2024: Fitch Ratings has affirmed Singer Finance (Lanka) PLC’s (SFL) National Long-Term Rating of ‘BBB(lka)’. The Outlook is Stable. Fitch has also affirmed SFL’s outstanding senior unsecured debt at ‘BBB(lka)’ and outstanding subordinated unsecured debentures at ‘BB+(lka)’.
KEY RATING DRIVERS
Shareholder Support Underpins Rating: SFL’s rating is based on our expectation of support from its parent, consumer-durable retailer, Singer (Sri Lanka) PLC (Singer, A(lka)/Stable). This is based on our assessment of Singer’s ability and propensity to provide support, if needed. Singer has an 80% shareholding in SFL, which we expect to be maintained. The assessment also considers the common brand name and a record of equity injections into SFL by Singer.
Moderate Synergies: We believe SFL has limited synergies with Singer, as evident from SFL’s small share of lending within the group’s ecosystem. We also believe support from the parent could be constrained by SFL’s significant size relative to Singer, as its assets represented 40% of group assets as at end-2023. SFL’s operational integration with the group is also low, although the parent has increased its focus on the subsidiary’s strategic long-term decision-making over the past few years and has meaningful representation on SFL’s board.
Weak Standalone Profile: SFL’s intrinsic financial position is weaker than its support-driven rating. It has a small domestic vehicle-focused lending franchise and a high-risk appetite stemming from its exposure to customer segments that are more susceptible to difficult operating conditions.
Vehicle Loans Remain Dominant: SFL’s business model is dominated by vehicle financing, which accounted for 68% of its lending portfolio as at end-2023. Gold loans have grown at a faster rate in the past few quarters, reaching 25% of SFL’s portfolio, amid lower demand for vehicle financing. However, we do not expect a major change in SFL’s vehicle-focused business mix in the medium term, given its more established franchise in this segment.
Stabilising Economic Outlook: We expect the operating environment for Sri Lankan finance and leasing companies to continue to stabilize, following the inflation and interest-rate shocks over the past two years. Easing inflation and interest-rate pressure should provide steadier conditions for sector performance, but some headwinds linger, with higher taxes weighing on household finances in 2024. Investor confidence will also take time to recover. Nonetheless, we expect economic activity in Sri Lanka to improve in the financial year ending March 2025 (FY25), as GDP growth recovers.
Asset Quality to Improve: SFL’s reported stage 3 assets ratio rose to 11.9% in FYE23, from 6.6% in FY22, on weaker collections in its core vehicle loan segment as well as the implementation of a stricter stage 3 recognition rule. That said, asset quality has shown signs of improvement, with a decline in delinquencies in recent months. Loan collections could further increase as borrower repayment capability improves on the gradually stabilising economy and declining inflation and interest rates.
Profitability to Recover, Leverage Rising: We expect SFL’s net interest margin to gradually recover in the medium-term amid a declining interest-rate environment. This, along with a potential pick-up in loan growth, should support earnings and profitability, but strong loan expansion in the medium-term could pressure leverage.
Pre-tax profit/average total assets declined to an annualised 2.7% in 9MFY24 (FY23: 3.1%, FY22: 4.5%), on a sharply narrower net interest margin of 9.0%, against 9.4% in FY23 and 12.7% in FY22. This followed a surge in borrowing costs due to rising interest rates. SFL’s debt/tangible equity reached 5.8x at end-2023, from 5.3x at FYE23, and is likely to remain at higher levels in the medium term.
Improved Funding and Liquidity: SFL’s share of unsecured deposits/total debt swelled to 81% by end-2023, from 66% at FYE22, supported by a greater focus on raising deposits. Increased cash and cash equivalents from deposit raising and reduced lending mitigated near-term liquidity pressure. Liquid assets/total assets reached 23% by end-2023, from 8% at FYE22, as SFL boosted its investments in liquid assets amid fewer lending opportunities.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
SFL’s rating is sensitive to changes in Singer’s credit profile, as reflected in the parent’s National Rating. An increase in SFL’s size relative to Singer that makes extraordinary support more onerous or a delay in providing liquidity support relative to SFL’s needs could also lead to negative rating action on SFL.
SFL’s rating may also be downgraded due to a weakening in Singer’s propensity to support SFL due to diminishing links. That said, SFL’s standalone credit profile could provide a floor to the rating.
Factors that Could, Individually or Collectively, Lead to Positive Rating
Action/Upgrade
A positive turnaround in Singer’s financial prospects or an increase in SFL’s strategic importance to Singer through a greater role within the group could lead to narrower notching from Singer’s profile. A large improvement in SFL’s intrinsic credit profile could result in its ratings been derived from its standalone profile.
DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS
SENIOR UNSECURED DEBT
The rating on SFL’s senior unsecured debt is in line with the National Long-Term Rating, as the debt constitutes the unsubordinated obligations of the company.
SUBORDINATED UNSECURED DEBT
SFL’s Sri Lankan rupee-denominated subordinated debentures are rated two notches below its National Long-Term Rating to reflect their subordination to senior unsecured obligations. Fitch’s baseline notching of two notches for loss severity reflects our expectation of poor recovery. There is no additional notching for non-performance risk.
DEBT AND OTHER INSTRUMENT RATINGS: RATING SENSITIVITIES
SFL’s senior unsecured debt and subordinated unsecured debt ratings will move in tandem with the National Long-Term Rating.
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
SFL’s rating is driven by Singer’s National Long-Term Rating.
