LB Finance PLC, Sri Lanka’s third largest non-bank finance company by assets, increased its net profit for the quarter ended September 30, 2016 (2Q17) by 20 percent to Rs.948.1 billion or Rs.6.84 a share from a year ago supported by relatively strong growth in loans and leases amid toughened lending conditions.
The company loans and leases amounted to Rs.7.5 billion during the six months to September 30, but the deposits had a negative growth. LB Finance’s lending growth during the six months was on par or in some cases above the total lending growth recorded during a nine months period by some of the small and mid-sized banks.
L B Finance, which generally maintains a double-digit interest margin, may have seen some pressure on its margins as the interest costs rose by a faster rate than income from interest.
The net interest income rose by 17 percent to Rs.2.42 billion as the interest income rose by 25 percent Year-on-Year (YoY) to Rs.4.3 billion, while the interest expense grew by a faster 36 percent YoY to Rs.1.89 billion.
The company managed to maintain relatively higher margins due to its high yielding products such as microfinance, two-wheeler and three-wheeler leasing and gold-backed lending.
The company maintains return on equity of 34.43 percent and return on assets of 4.3 percent – extremely high but slightly down from the beginning of the financial year.
Nevertheless, the performance could be adversely impacted during the remainder of the year as the budget proposed to contain credit flows into vehicles, particularly two-wheelers and three-wheelers, as the Loan-To-Value (LTV) ratio was brought down to just 25 percent from 70 percent. However, it is uncertain from when the proposal will become law as the Central Bank has to issue directives to that effect.
Meanwhile, the higher risk appetite could also pose challenges for the company as it has a higher exposure to the microfinancing sector and pawning – the sectors that are susceptible to economic soundness and disposable incomes which could be further deteriorated by the higher indirect taxes imposed recently.
While the asset quality matrices were not published in the interim financial accounts, the company in a statement said provisions made for possible bad loans had seen a significant reduction of 95 percent to Rs.15 million from a year ago.
As of September 30, LB Finance had an asset base of Rs.90 billion.
The company had to fund its lending growth purely through borrowings as the deposits had a negative growth. It is not clear whether the company would go ahead with its plans to raise Rs. 5.0 billion through a debenture issue, as the 2017 budget proposed to lift the income tax exemption hitherto available on interest on corporate debt. Such a measure could dilute the investor appeal to invest in corporate debt.
Meanwhile, for the six months ended September 30, 2016, the company made a net profit of Rs.1.86 billion or Rs.13. 43 a share, an increase of 19 percent from a year ago.
The net interest income rose by 15 percent YoY to Rs. 4.75 billion and the net fee and commission income grew by 4 percent YoY to Rs. 568.6 million.
The investment vehicle of Dhammika Perera, Vallibel One PLC, together with Royal Ceramics Lanka PLC held 77.83 percent stake in LB Finance PLC.