Kandy Times

Fitch Ratings Lanka said last week it has affirmed the 'BBB+(lka)' National Long-term rating of Senkadagala Finance Company Limited (SF).

At the same time, the agency affirmed the BBB+(lka) National rating assigned to the 2005/2009 unsubordinated redeemable debentures of SFC. The outlook on the ratings is stable, a Fitch statement said.

'BBB' National ratings denote an adequate credit risk relative to other issuers or issues in the same country. However, changes in circumstances or economic conditions are more likely to affect the capacity for timely repayment of these financial commitments than for financial commitments denoted by a higher rated category.

“The rating reflects SFC's good asset quality supported by the company's IT system and operating procedures, high profitability and comfortable level of capitalisation. The rating also takes into consideration the relative assets size and limited revenue diversity of SFC in comparison to other financial institutions,” the statement said.

SF experienced strong loan growth of 88% during FY06 driven by branch expansion undertaken over the past few years. However, its gross non-performing loans ("NPLs") (defined by Fitch as loans in arrears for over three months)/gross loans was 4% at FYE06 against 2.9% at FYE05. The company's good asset quality can be attributed to its strong origination and monitoring processes facilitated by its IT system as well as good recoveries of arrears. SF also follows a policy of writing off loans that are over six months in arrears (except those secured by deposits).

Fitch said medium-term asset-backed loans secured by the mortgage of lease receivables have increasingly been used by SF to fund its loan growth.

Fitch notes that a continued increase in asset-backed loans, particularly where asset replacement is allowed could increase risk to other senior creditors.

“The agency takes comfort from the company's good asset quality and its intention to increase its deposit base by improving deposit mobilisation through increased marketing efforts and the introduction of savings deposits,” the statement said.

In FY06, SF's net income increased by 118% while profitability as measured by return on assets increased to 6.6% from 5.3% in FY05 on the back of high loan growth and healthy margins. However, its capital ratios declined but remained comfortable.

Its Tier 1 and total capital adequacy ratio declined to 14.3% at FYE06 from 18.1% at FYE05. The company's capital position is expected to remain healthy with high profitability and earnings retention.

Senkadagala Finance is a family-owned finance company founded by E.W. Balasuriya in 1968, in which the family directly and indirectly, owns 98% of the company's equity. The company's main activity is vehicle finance.

SF is regulated by the Central Bank of Sri Lanka as a registered finance company under the Finance Companies Act 78 of 1988 and is a registered leasing establishment under the Finance Leasing Act 56 of 2000. Presently the company has a network of 16 branches and as at March 2006, it accounted for 4.7% of the assets of registered finance companies in Sri Lanka.