Ratings agency Fitch has upheld the national long-term rating of "BB-(lka)" with stable outlook for Sri Lankan mid-sized registered finance company Edirisinghe Trust Investment (ETI), which is 99.2% owned by the Soma Edirisinghe family.
According to Fitch's Rating Action and Commentary (RAC); "ETI's rating reflects its relatively weak core equity position and large exposure to real estate investments. It also takes into account the company's considerable exposure to, and solid franchise in, low-risk gold-backed lending (pawning), and its consequently sound asset quality."
Fitch also suggested a rating upgrade should substantial improvements occur in the company's core capital base and profitability with asset quality also kept in check. Also added; "Conversely, increased exposure to debt-funded investments leading to lower profitability, and/or deterioration in capitalisation or asset quality could result in a downgrade."
Fitch also revealed real estate "accounted for 22% of assets for the nine months ended December 2010 (9MFY11; FYE09:24%) and are debt-funded" and property sales, said to be at a lower value, had "weighed on profitability." As a result, Fitch pointed out "profitability as measured by returns on assets at 1.7% in 9MFY11 (FY10: 0.6%) was low in relation to other registered finance companies (RFCs) rated by Fitch (FY10: 1.8%)." It also emerged that ETI intends to "sell off a considerable share of its property projects by end-Q1FY12" and the company had also "not undertaken further real estate investments since 2009 and has indicated that it will continue not to do so as it further sells down the portfolio."
Also shown was ETI's pawning business growing further with "74% of total advances at end-9MFY11 (FYE10: 68%; FYE09: 58%) enhancing ETI's asset quality and maturity schedules. Gross non-performing advances (NPAs) accounted for 5.1% of advances at 9MFY11 (FYE10: 6.3%) and compared well with other RFCs rated by Fitch (FYE10: 12.9%)." At the same time, it was also suggested "asset quality could weaken as ETI grows its vehicle financing portfolio where NPAs are considerably higher (24% of advances at end-9MFY11)."
However, Fitch opined "core absolute capitalisation remains weak and core equity (excluding fair value gains on investment properties) was 5% of total assets at end-9MFY11. As a result, ETI would need to strengthen its capital base to support future growth, particularly of nonpawning products which carry a higher risk weight."