In early March 2024, Fitch published routine rating outlook affirmations for six non-bank financial institutions (NBFIs), or finance and leasing companies, which piqued our interest more than usual due to their unique relationships with their parent companies and established larger businesses.
In the realm of finance, the strength and stability of a company can often be traced back to the support and strategic integration it receives from its parent entity. An examination of Fitch reports sheds light on the spectrum of financial health and parent-company relationships across the finance sector, from those grappling with significant challenges to those standing on firmer ground.
Richard Pieris Finance
According to Fitch, Richard Pieris Finance (RPF) has a Negative Outlook that reflects downside risk to the parent’s propensity to provide extraordinary support. “This is due to the financing subsidiary’s weakened performance in recent years, which could continue to diminish its standing within the group. We regard RPF to be of limited importance to the parent, given its low contribution to the group and small share of lending within the parent’s ecosystem.” Fitch notes.
Richard Pieris is an 80 billion-revenue group with interests in retail (Arpico), plantations, tyre manufacturing, furniture, plastics and rubber, automotive and electronics. The group originated during the colonial era when Sri Lanka was called Ceylon.
With a leverage ratio that notably exceeds its peers and a dire regulatory capital situation, RPF’s outlook is constrained by a high-risk profile and an above-industry gross stage-3 loan ratio of 43.9% at end 1HFY24. Its struggle is compounded by a negative net interest margin in 1HFY24, highlighting significant financial distress amidst subdued loan growth prospects.
According to Fitch, RPF is the only finance and leasing company among Fitch-rated peers to deliver a negative net interest margin following the sharp increase in domestic interest rates.
“RPF’s capitalization and leverage remain weak. Its regulatory Tier 1 capital ratio of 8.0% and its core capital fell below minimum prudential requirements – 8.5% and Rs2.5 billion, respectively – at end September 2023 (1HFY24) on continued losses. This resulted in the Central Bank of Sri Lanka imposing a cap on deposit mobilization. Furthermore, RPF’s leverage ratio, which we estimate at above 6x, is the highest among Fitch-rated peers,” the rating agency said.
Abans Finance
Abans Finance’s relationship with its parent Rs35 billion revenue Abans PLC underscores a complex dynamic of expected support tempered by uncertainties. Despite a shared strategic vision, Abans Finance’s “Materially Weak Standalone Profile” and a significant NPL ratio of 26.1% as of end September 2023 reveal inherent risks. The finance company’s limited role within the group and its negligible share of Abans’ consumer-durable revenue further underscore its challenges, exacerbated by a limited capital buffer and undesirable leverage ratio.
“The Negative Outlook reflects downside risks to Abans Finance’s support-driven rating due to a potential weakening in Abans’ propensity to extend support to the subsidiary. This is in light of past sale attempts and a regulatory capital shortfall since October 2023, which has led the authorities to impose a renewed deposit cap on the company,” Fitch says. The rating agency believes Abans Finance remains a candidate for disposal.
Fitch expects Abans Finance to operate with a limited buffer over the regulatory minimum capital of Rs2.5 billion until the provisioning gap is meaningfully resolved. “Furthermore, we expect an uptick in leverage as Abans Finance pursues growth in the medium term. Debt/tangible equity stood at 2.4x at end 2023, lower than the Fitch-rated peer average and the historical average,” it says.
AMW Capital Leasing and Finance
AMW Capital Leasing and Finance (AMWCL) finds itself in a challenging position due to the weakened financial capability of its parent, Associated Motor Ways (AMW), caused by restrictions on vehicle imports.
“A prolonged ban on vehicle imports continues to impede AMW’s core business of vehicle importation and sales, weakening its earnings capacity and liquidity position. AMW was one of Sri Lanka’s largest vehicle importers before the curbs. Sri Lanka has gradually rolled back import restrictions limiting vehicle classes, but curbs remain on AMW’s primary segment – passenger cars,” Fitch notes.
Despite a shared branding and strategic agenda, AMWCL’s small market share and a leverage ratio of 0.8x at end 2023 reflect a constrained operational landscape. The finance company’s profitability and asset quality face pressures from the economic environment, although there is potential for recovery as market conditions improve.
Fitch says: “Liquid asset holdings more than doubled to 35.8% of total assets in 2023 (2022: 15.3%), as loan growth remained subdued. We expect the share of liquid assets to diminish as lending resumes. That said, AMWCL’s unsecured debt/total debt ratio remains among the lowest of Fitch-rated finance and leasing companies, due to its moderate appetite for deposit funding relative to wholesale funding”.
Singer Finance
Singer Finance PLC (SFL) leverages the support of Rs54 billion revenue Singer (Sri Lanka) PLC, yet faces hurdles due to its significant size relative to the parent and a concentrated vehicle financing portfolio, Fitch notes.
“We believe SFL has limited synergies with Singer, as evident from SFL’s small share of lending within the group’s ecosystem. We also believe support from the parent could be constrained by SFL’s significant size relative to Singer, as its assets represented 40% of group assets as at end 2023,” Fitch says.
“SFL’s operational integration with the group is also low, although the parent has increased its focus on the subsidiary’s strategic long-term decision-making over the past few years and has meaningful representation on SFL’s board,” the rating agency notes.
With a leverage ratio reaching 5.8x at the end of 2023 and an increasing stage 3 assets ratio, Singer Finance navigates a path of recovery amid a stabilizing economic outlook. The company’s efforts to diversify its lending portfolio and improve asset quality are crucial steps towards bolstering its financial health.
“SFL’s share of unsecured deposits/total debt swelled to 81% by the end-2023, from 66% at FYE22, supported by a greater focus on raising deposits, while increased cash and cash equivalents from deposit raising and reduced lending mitigated near-term liquidity pressure. Liquid assets/total assets reached 23% by end 2023, from 8% at FYE22, as SFL boosted its investments in liquid assets amid fewer lending opportunities,” Fitch notes.
Madindra Ideal Finance
Mahindra Ideal Finance showcases a promising trajectory, supported by Mahindra & Mahindra Financial Services Limited (MMFL). Despite its limited importance to the parent, the finance company’s integration and strategic alignment with MMFL’s broader objectives hint at a supportive backdrop.
The limited importance to its parent is due to the finance company’s nascent role in the group and a limited performance record since the acquisition. MMFL’s investment in Mahindra Ideal aims to support Mahindra & Mahindra vehicle sales in Sri Lanka as part of its international expansion. Fitch believes that the reputational damage to MMFL could be contained due to the different jurisdictions of the entities. In addition, Ideal Motors, the previous dominant shareholder, remains a significant minority shareholder, Fitch notes.
With an improving performance, marked by a lower debt-to-equity ratio of 2.3x and an enhanced 90-day past due loans ratio, Mahindra Ideal Finance is poised for growth, benefiting from the stabilizing economic conditions and a focus on vehicle financing, the rating agency says.
According to Fitch, improving performance is reflected in the improvement in its 90-day past due loans ratio and funding costs. The performance will likely improve further as loan growth picks up, the net interest margin recovers, and operational and credit costs remain controlled. The liquidity profile will likely remain stable due to sustained momentum in deposit growth. Even so, the low debt/tangible equity of 2.3x at the end of December 2023 will increase with higher business growth, Fitch observes.
Dialog Finance
Dialog Finance (DF), driven by the robust backing of Dialog Axiata PLC, a Rs187 billion revenue telco, epitomizes a finance company with the potential for growth and innovation in the digital financial services realm.
“DF was acquired in 2017 to support Dialog’s aspiration to expand into digital financial services – a key strategic growth area for the parent – but delays in obtaining necessary regulatory approvals, together with a weak economic environment, disrupted the launch of its fintech-based offerings in a meaningful manner,” Fitch reports.
Despite its modest role within Dialog’s core business, the finance company’s strategic plans for merchant acquisition and consumer financing signal ambitious expansion efforts. With a low leverage ratio of 1.3x at the end of 2023 and a relatively healthy regulatory Tier 1 capital ratio, DF stands on solid ground, ready to navigate the challenges of asset quality and strategic growth in a dynamic market environment.
“DF’s planned lending strategy outside the parent’s ecosystem, together with increased exposure to quick loans and device financing, could pose a threat to its asset quality in the medium term if these exposures are not well managed through strong risk-control measures,” Fitch says. DF’s non-performing loans ratio (over three months due) increased to 5.4% by end 2023, from 1.3% at end 2022, but remains better than peers’ on account of its large share of ecosystem lending, where credit risk remains low, the rating agency observes.
Nurturing and Letting Go
Fitch’s routine affirmations of six non-bank financial institutions highlight the pivotal role of parent-company relationships in shaping their financial destinies amidst market challenges.
Richar Pieris Finance was an obvious extension of the parent company’s evolution into a conglomerate while Abans Finance, Singer Finance, Mahindra Ideal Finance and AWM Capital Leasing and Finance hoped to aid their parent companies grow the retail side of the business with credit products like hire purchase and leasing. Dialog Finance was incorporated to enable its telco parent Dialog Axiata explore opportunities in the realm of fintech. Much has changed since their birth. The economic crisis has challenged everyone and strained relationships between parent companies and subsidiaries to varying degrees. As these entities manoeuvre through their distinct paths, their experiences reflect the broader narrative of adaptability and resilience essential for navigating the unpredictable waters of the finance industry.
Abans Finance faces a negative outlook due to possible reduced parental support and regulatory caps. Its limited group role and high-risk profile suggest the potential for disposal despite expected improvements in asset quality and growth. Richard Pieris Finance relies on support from Richard Pieris & Company PLC, compromised by RPF’s poor performance and regulatory issues. Mahindra Ideal Finance benefits from potential support from Mahindra & Mahindra Financial Services Limited, with prospects buoyed by the stabilizing economy. Singer Finance draws on Singer (Sri Lanka) PLC’s backing but is limited by SFL’s significant size and operational integration. A recovering economy may aid its vehicle financing focus, though leverage concerns persist. AMW Capital Leasing and Finance is constrained by its parent’s challenges amidst constraints on vehicle imports which offers some hope for improvement and Dialog Finance is poised for aggressive expansion in digital financial services backed by its parent.
Quick Takes
- Abans Finance (BBB+/Negative Outlook) is closely tied to its parent, Abans PLC, with expectations of support despite a shaky past and regulatory challenges. Its outlook is clouded by potential weakening parental support and a materially weak standalone profile. The company aims for rapid growth while navigating a tight regulatory and operational landscape.
- Richard Pieris Finance (A/Negative Outlook) relies on the expected support from Richard Pieris & Company PLC, amid concerns over its weakened performance and limited group role. RPF faces critical capitalization issues and high-risk lending, with a future dependent on improving financial health and regulatory compliance.
- Mahindra Ideal Finance (AA-/Stable Outlook) benefits from its connection to Mahindra & Mahindra Financial Services Limited (MMFL), despite being of limited group importance. With a stabilizing economic outlook, MID is on a path to performance improvement, though its financial strength and market share remain modest.
- Singer Finance PLC (BBB/Stable Outlook) shows moderate parent-company synergies with assets contributing 40% of those of the parent company Singer (Sri Lanka) PLC with growth potential.
- AMW Capital Leasing and Finance (BBB/Negative Outlook) is constrained by a weak parent. Its future is tied to Associated Motor Ways (Pvt) Limited (AMW), with challenges from AMW’s weakened capacity from the prolonged ban on vehicle imports affecting support.
- Dialog Finance (AA/Stable Outlook), supported by Dialog Axiata PLC, has ambitious expansion plans in digital financial services despite a limited role in the parent’s core business. Its strategy involves aggressive growth with careful navigation of potential asset-quality pressures and leverage increases.