ICRA Lanka Limited has reaffirmed the issuer rating of People’s Merchant Finance PLC (“PMF”/“the Company”) at [SL]B (Pronounced SL B); while revising the outlook to Stable from rating watch with developing implications.
The rating factors in the recent capital infusion of LKR 812 million via a rights issue, which enabled the Company to meet the regulatory core capital requirement of LKR 2.0 billion. As of March 2021, PMF reported a core capital of LKR 2.1 billion, which puts the Company above the current minimum core capital requirement of LKR 2.0 billion. However, ICRA Lanka notes that the Company needs to meet the upcoming capital hurdle of LKR 2.5billion by December 2021. The rating continues to take note of the Company’s small scale of operations, the limited franchise and modest asset quality. The limitations on the Company’s funding diversity have been somewhat relaxed post the recently completed rights issue, as the Central Bank of Sri Lanka (CBSL) removed the borrowing cap of LKR 39 Mn and relaxed the deposit cap to LKR 3.5 billion from LKR 2.5 billion. ICRA Lanka would closely monitor the improvement in PMF’s capital structure to meet the next capital requirement, asset quality movement, and its overall financial performance going forward.
The outlook may be revised to ‘Positive’ in case of a steady improvement in the Capital and earnings as portfolio expands, while keeping the asset quality under control. The outlook may be revised to ‘Negative’ in case of a significant weakening in the asset quality, profitability, liquidity, or capital profile. Any regulatory action on the Company, which could impact its business and financial performance, would also be a credit Negative.
Credit challenges
Small scale of operations and modest franchise: People’s Merchant Finance (“PMF”/“the Company”) is a small-scaled licensed finance company with LKR 4.7 Bn asset base and a loan portfolio of LKR 3 billion as of March-21. PMF was incorporated in 1983 as an investment banking arm of Peoples Bank. Subsequently, the Company became a licensed finance company with Peoples Bank (“PB”) and its subsidiary Peoples Leasing and Finance PLC (“PLC”) being the main shareholders with 50.16% and 37.06% shareholding prior to May-19. Sterling Capital Investment (Pvt) Limited (SCI) infused a total of LKR 1.36 billion (LKR 160 million through a private placement in March-19 and LKR 1.2 billion through a rights issue in May-19) to become the main shareholder with a stake of 68.02% in May-19. Following a further infusion of capital through a rights issue in March-21, Sterling Capital Investment (Pvt) Ltd further increased its shareholding to 78.55% as it subscribed to LKR 790 million of the total LKR 812 million capital. PB and PLC continue to maintain minority stakes of 10.36% and 7.65% as in March-21 respectively. ICRA Lanka also notes the growth of the portfolio in FY2021 post the restructuring process. PMF reported a YoY growth of 67% in its gross portfolio in FY2021 and this was mainly through the safe asset classes such as gold loans and margin trading. The Company’s portfolio consists of leasing (51%), loans (20%), gold loans (16%), margin trading (13%) as of Mar-21. PMF operates through a branch network of 11 branches.
Improved asset quality levels, yet remain weaker than sector average: PMF reported a significantly high gross NPA ratio of 29.72% as on Mar-20 as compared to 11.66% as on Mar-19. This was mainly as a result of the portfolio moderation as the Company halted much of its disbursements in the FY2020 amidst the restructuring process. However, the Company has been able to improve its gross NPA ratios in FY2021 due to its continued effort on recoveries and quality of new credit generations. The absolute NPAs reduced by 20% from last year to LKR 490 Mn as of Mar-21, while the growth of the portfolio (around 70%) also contributed to the improvement of the gross NPA ratio to 13.87% as of Mar-21. However, the asset quality levels continued to remain below the sector average (11.32% as of March-21). ICRA Lanka also noted the high concentration level of the top 10 NPAs which accounted for 48% of the total NPAs as of Mar-21. The Company maintained a high provision coverage which stood at 84.21% as on Mar-21 as compared to the licensed finance sector average of 63.98% as on Mar-21. Management’s ability to control the new slippages, recover the legacy portfolio, and further improve the quality of the new credit originations would be crucial, going forward.
Limited funding diversification” The Company continues to face limitations on the ability to diversify its funding base due to the limited franchise and the small scale of operations. Furthermore, the regulatory cap of LKR 3.5 billion on deposits also limits the funding profile of the Company. Following the recent capital infusion, the CBSL removed the LKR 39 million borrowing cap imposed earlier; and relaxed the deposit cap to LKR 3.5 billion from LKR 2.5 billion until the regulatory capital requirement of LKR 2.5 billion by December 2021 is met. Further, following the capital infusions from May-19, the Company continued to report positive short-term (less than 1 year) ALM mismatches and reported 18.25% as of Mar-21 (22.57% as of Mar-20).
PMF meets the regulatory core capital requirement of LKR 2 billion, however, is still short of the LKR 2.5 billion regulatory core capital requirement to be met by December 2021: Over the past years, PMF has continued to operate below the minimum regulatory core capital requirement. In May-2019, Sterling Capital Investments (Pvt) Ltd infused LKR 1.36 Bn into the Company to gain the majority stake of the Company. Further capital infusion via a rights issue in CY2020 got delayed amidst the pandemic. Finally, in Mar-21, PMF concluded its rights issue where it raised LKR 812 Mn. Following the rights issue, the Company reported a core capital of LKR 2,124 Mn and is above the regulatory requirement of LKR 2,000 Mn. (ICRA Lanka)
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