Fitch Ratings Lanka has assigned the minimum investment grade rating, BBB- to the Ondaatje family-controlled finance company, Mercantile Investments & Finance PLC (MIF) with a ‘stable’ outlook.
The company’s outstanding senior debenture too carries the same rating.
The rating is supported by the modest franchise stemming from the company’s long operating history, satisfactory capitalization and the loan book exposure to less risky customers, the Fitch said.
However, the company’s investments into equity assets (company shares) remains an outlier in the industry as its equity investments accounted for little over 17 percent of the total assets by end-September 2015 (1H’16) leaving the company vulnerable to market risk.
MIF’s equity investment exposure also breaches the regulatory ceiling for the Non-Banking Financing Institutions (NBFI) which limits equity investments to 25 percent of capital funds but MIF’s exposure was 52.2 percent as of end-March 2015.
Further, the low profitability metrics and greater reliance on concentrated and short-term funding too remain key risks for the company.
For the six months ended September 30, 2015, the company posted a net profit of Rs.279.3 million, up 6.3 percent from a year ago.
The company has an asset base of Rs.31.1 billion, which comprises of a total advances base of Rs.22 billion, up Rs.2.5 billion during the six months.
As at end-June 2015, the company accounted for 3.3 percent of NBFI sector assets in Sri Lanka.
The Rs.15 billion leasing and higher purchase portfolio is twice the size of the loans and advances book.
“Fitch believes that MIF’s higher exposure to less risky assets such as of motor cars (40 percent of total advances at FYE 15) has supported its asset quality. MIF’s gross regulatory NPL ratio (FYE 15 – 4.2 percent) has historically remained below that of the industry,” Fitch said.
Deposits remain the main source of funding of MIF and as of end-September 2015, the company had a deposit base of Rs.14.8 billion, an increase of Rs.1.1 billion during the nine months.
However, the concentrated deposit base and high negative maturity mismatches as risks to its funding profile.
Meanwhile, the return on assets has declined to 1.79 percent from 3.2 percent in FYE 2013 largely due to the weak net interest margin.
“Fitch believes that a potential increase in operating costs due to branch expansion and an increase in credit cost could hamper operating profitability and internal capital generation,” the rating agency said.
The company was established in 1964 and the majority owned by Ondaatje family directly holds 57 percent of MIF’s equity.