Fitch Ratings Lanka Limited has assigned Serendib Finance Limited a national long-term rating of ‘A+(lka)’. The Outlook is Stable.
Serendib’s rating is driven by Fitch’s view that support would be forthcoming from its parent, Commercial Bank of Ceylon PLC (CB), the largest private commercial bank in Sri Lanka.
CB’s credit profile and its ability to support Serendib is reflected in its ‘AA(lka)’/Stable rating, which is underpinned by its standalone strength. The support assessment also takes into account CB’s 100 percent ownership of Serendib and a track record of support by the parent via multiple equity infusions.
Serendib is rated two notches below its parent because of the subsidiary’s limited role within the CB group. Serendib focuses mainly on vehicle financing, which contributed only 5.4 percent of the group’s gross loans at end-March 2018. It also reflects Serendib’s limited operational integration with the parent and their different brands.
Serendib’s intrinsic financial profile is considerably weaker than its support-driven rating as it has a heightened risk appetite due to weak underwriting standards and risk-management practices. This is already reflected in its weaker-than-industry non-performing loan (NPL) ratio; Serendib’s regulatory NPL ratio spiked to 26.9 percent by end-March 2018 from 7.2 percent at end-March 2017. Fitch believes Serendib’s asset quality is likely to remain weaker than that of its peers in the medium term.
Serendib’s profitability remained weak as a result of high impairment charges. Any meaningful improvement in profitability would thus be contingent upon Serendib’s ability to improve its underwriting standards and risk controls to support a sustained improvement in asset quality, as well as its ability to reduce the cost of funds.
We expect CB to inject equity capital at regular intervals to enable Serendib to meet the minimum regulatory capital of Rs.2.5 billion by 1 January 2021 despite the subsidiary’s above industry total capital ratio of 23.8 percent at end-March 2018.
Serendib’s funding profile has limited diversity compared with peers due to its total reliance on bank borrowings, which are susceptible to market conditions, making access to funding more uncertain during periods of stress.