LB Finance 2Q profits weighed down by shrinking margins, provisions and higher costs

In a potential bellwether for the licensed finance and leasing company sector earnings, LB Finance PLC has reported lower profits amid shrinking margins, surge in provisions and increase in operating expenses for the quarter ended September 30, 2022 (2Q23). 

The company reported earnings of Rs.3.59 a share or Rs.1.99 billion for the July-September quarter, down 5 percent from the earnings of Rs.3.79 a share or Rs.2.09 billion reported for the same period, last year, reflecting the tougher operating conditions the licensed finance companies are confronted with since the economy’s collapse earlier this year. For the six months through September, the bank reported earnings of Rs.7.36 a share or Rs.4.08 billion, up 18 percent from Rs.6.23 a share or Rs.3.45 billion in the year earlier period.  The soaring interest rates have crimped margins of financial intermediaries including licensed finance companies such as LB Finance as they had to offer higher rates for depositors while the growth in new loans has come to a near standstill except for few products such as gold-backed loans as people pawn their jewellery to make ends meet amid the cost of living crisis.  Reflecting this phenomenon, the company’s interest income rose by 47 percent to Rs.9.62 billion in the quarter from a year earlier, but the corresponding interest expense surged by 142 percent to Rs.5.06 billion due to deposit repricing. As a result the margins fell sharply, containing the growth in the net interest income to just 2 percent to Rs.4.56 billion.   Despite the sharp slowdown in loans and leases, gold-backed loans, which make up a larger section of total loans, were believed to have grown substantially from the 32 percent of gross loans the company had by March 31, 2022, Fitch Ratings in a recent rating report on the company said.  Gold-backed loans typically generate high interest yields as they fetch rates in the north of 32 percent or more.  In the six months to September, the total loans and receivables grew by Rs.14.7 billion or 15.7 percent, but the lease portfolio fell by Rs.4.5 billion to Rs.37.1 billion.  LB Finance stands as the third largest finance and leasing company in the country by assets, accounting for 10 percent of sector assets and 11.2 percent of deposits by the end of June 2022, Fitch said.  

By the end of September, the company had total assets of Rs.175.1 billion and deposits of Rs.100.5 billion, which grew by 11.4 billion in the six months.   The company saw its fee and commission incomes rising by 39 percent to Rs.754.4 million in the quarter but didn’t provide a breakdown of its fees. 
The company set aside Rs.228.3 million as loan loss provisions, up 81 percent from the year earlier period. 
Total operating expenses rose by 20 percent to Rs.1.78 billion reflecting inflationary pressure on the company’s operations.

The company reported  a gross non-performing loans ratio of 4.81 percent, slightly down from 5.1 percent in June.
Dhammika Perera-controlled Vallibel One PLC held 51.751 percent stake in LB Finance while Royal Ceramics Lanka PLC, another firm controlled by Perera had 26.079 percent in the company.