Business Times

Finance companies still weak but expected to do better in 2010

The profitability of Registered Finance Companies (RFC) and Specialised Leasing Companies (SLC), are expected to improve in 2010, but sector assets are still shaky. RFC and SLC sector profitability is expected to increase in 2010 because of the sharp drop in interest rates, said Fitch Ratings, in a report.

"However Fitch notes that the recovery of the industry's current weak asset quality could lag the positive macroeconomic trends seen at present, underlining the severity of the recent economic downturn and the higher risk nature of the industry's client base," said the rating agency.

The liquidity stresses faced by the wider RFC sector in 2009, have eased somewhat by now, but they have not completely receded. Meanwhile, the reduced deposit rates and higher credit demand in 2010 are expected to benefit stronger RFCs, but less well managed RFCs are still at risk.

"Fitch expects the improvement to be more rapid for higher rated RFCs, which generally have stronger capital positions and better deposit franchises. However, Fitch notes that a protraction of the high risk premiums, or a prolonged inability to overcome weak asset quality levels, could result in a loss of market share for weaker entities and a deterioration of credit profiles," said the rating agency.
Leasing companies on the other hand, are seen to have benefited faster from falling interest rates and their profitability has improved since March 2009.

Fitch observes that risk premiums on institutional funding (from banks) to better established and higher rated SLCs have remained intact, or in some cases reduced, in recent months. As a result, the profitability of such SLCs has broadly improved since March 2009," said the Fitch report. Again smaller companies, where risk management systems and controls are generally weaker, could continue to face profitability pressures over the medium term.

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