Lanka Rating Agency (LRA) has upgraded Vallibel Finance PLC’s (Vallibel) long-and short-term financial institution ratings from BB+ and NP to BBB-and P3, respectively.Concurrently, its issue rating of Rs.500 million unsecured subordinated redeemable debentures (2014/2019) is upgraded to BB+ from BB. Meanwhile, both long-term rating outlooks are reaffirmed at stable.
The upgrade is premised on the increase in market share of Vallibel in the LFC sector as well as its improved core performance indicators and improved franchise. Meanwhile, the ratings are supported by Vallibel’s above average asset quality and performance reflected in indicators that compare better than similar-rated industry peers’.
Vallibel’s asset quality is viewed as above average supported by asset quality indicators that compare better to similar rated peers’. The company’s credit assets grew a healthy 30.22 percent year-onyear (YoY) in fiscal 2014 and 23.56 percent (annualised) in 1H fiscal 2015, reflective of the expansion in its core lease and hire purchase portfolio supported by expansion in its branch network and improving franchise.
However, Vallibel’s absolute NPLs increased to Rs.509.59 million as at endFY March 2014 from Rs.251.97 million as at end-FY March 2013, increasing further to Rs.727.57 million as at end1H FY March 2015 due to the influx of new NPLs. The influx of NPLs stemmed from all asset classes as the loan book seasoned amidst a challenging external environment, this was a phenomenon observed across the LFC sector.
Subsequently, the gross NPL ratio moderated to 5.66 percent as at end-1H FY Mar 2015 from 2.55 percent as at end-FY Mar 2013 (end-FY Mar 2012: 1.81 percent), albeit the ratio compares better than most similar-rated peers. While our concerns hinge on the lack of seasoning in Vallibel’s loan book following robust credit asset growth and the increase in trend of NPLs, we expect this trend to reverse gradually going forward with the improving macroeconomic environment taking effect. Elsewhere, despite the influx in gross NPLs, the company’s NPL coverage ratio improved to 71.43 percent as at end-1H FY March 2015 (end-FY Mar 2013: 56.36 percent) comparing better than similar rated peers’, reflective of the increase in provisioning made during the same period.
Vallibel’s performance is deemed above average, supported by performance indicators that compare better than similar rated peers’.
The company’s net interest income grew 41.92 percent YoY to Rs.1,111.34 million in FY-March 2014, recording a further growth of 27.76 percent (annualised) during 1H- FY Mar 2015, largely reflective of the expansion in credit assets. Meanwhile, as expected, Vallibel’s NIM improved to 11.06 percent in 1H FY Mar 2015 from 10.16 percent in FY Mar 2013 as funding costs eased amidst deposits re-pricing faster than loans in a receding interest rate environment. Further, we note that Vallibel’s NIM compares better to that of similar-rated LFC sector peers’ engaged in similar lending segments.
The company’s overhead costs increased 47.94 percent YoY in fiscal 2014 and a further 19.36 percent (annualised) in 1H fiscal 2015 in view of branch expansion expenses, higher advertising expenses and increase in personnel costs stemming from higher staff force. Despite the increase in overhead costs, as expected, Vallibel’s cost-to-income ratio remained relatively stable clocking 46.18 percent in 1H fiscal 2015 (fiscal 2013: 44.76 percent) reflective of the increase in earnings levels in line with the broadening of NIM as well as new branches opened during 1H fiscal 2014 breaking even during the review period. Despite the slight increase in pre-tax profits, Vallibel’s return on assets (ROA) declined to 4.05 percent in fiscal 2014 from 5.37 percent in fiscal 2013, mainly due to the increase in overhead costs and higher impairment charges. Nevertheless, the ratio continues to be better than similar rated industry peers’.
Vallibel’s funding composition is dominated by public deposits, accounting for 76.51 percent of the funding mix as at end-FY March 2014 (end-FY Mar 2013: 70.30 percent). Customer deposits grew a robust 48.37 percent YoY in fiscal 2014 supported by Vallibel’s extended branch reach as well as its improving franchise.