Fitch Ratings Lanka this week downgraded Ceylease Financial Services Ltd's (CFSL) National Long-term rating to 'BB+(lka)' from 'BBB-(lka)' and simultaneously revised the Outlook to Negative from Stable. The agency has said it was withdrawing the 'BB+(lk)' rating on CFSL's proposed subordinated debenture issue, due to non-issuance.
The downgrade reflects Fitch's view that the weakening of CFSL's stand-alone financial profile is partly structural, as reflected in the sharper deterioration of its asset quality and profitability compared to peers. The Outlook revision reflects the potential challenges faced by the company in improving its current weak asset quality and successfully implementing recently instituted stringent credit controls.
“Conversely, the rating continues to derive comfort from the strength of its key shareholder, the state- owned Bank of Ceylon (BOC -55% ownership), and its demonstrated support,” Fitch said.
A dilution in BOC's ownership stake or a continued unchecked deterioration in CFSL's net NPL/equity ratio or profitability, or the company's inability to successfully implement credit controls and consequently stem NPL accretion on incremental lending over the next 12-18 months, could result in a further downgrade.
CFSL's gross NPL ratio (at the 3-month arrears level) and its net (un-provided) NPL/equity remain a key concern at present. Both ratios remained weak as at end-Q110 at 27.42% and 117.16%, respectively, although showing some improvement in H209 due to recovery of early delinquencies. However, NPL slippage into the 'above 12-month arrears' category was sharp between June 2009 and March 2010, and in Fitch's opinion, could prove challenging to recover over the medium-term, despite the company's renewed efforts.