Fitch slashes Multi Finance's outlook

Global rating agency Fitch Lanka has revised Sri Lankabased Multi Finance PLC's (MFP) Outlook to Negative from Stable. At the same time, the agency has affirmed MFP's National Long-Term rating at 'B+(lka)'. The revision of the Outlook reflects MFP's weakening liquidity profile and net losses due to higher borrowing costs and increased operating expenses driven by branch expansion and relocation. The net losses in nine months ending December-2012 have also resulted in sharply decreasing capitalisation which, however, remains commensurate with some of the higher-rated peers. The ratings also reflect the company's small asset size and less established, but growing, franchise relative to that of domestic peers.

The rating may be downgraded if MFP is unable to secure sources to fund its large maturity mismatches along with unstable deposits, which could cause further liquidity pressure, and a widening of net losses weakening its profitability and capitalisation. Conversely MFP's ability to stem the deterioration of its liquidity and profitability could lead to the Outlook being revised to Stable.

Global rating agency Fitch expects liquidity pressure to remain intense as cumulative maturity gaps under 12 months are high with limited confirmed unutilised credit lines at end-2012. MFP will have to source deposits or obtain borrowings to fund its existing mismatches. MFP has a revolving credit line from its parent, Entrust Limited, but repayment is on demand.

Liquid assets to deposits decreased to 10.3% in the nine months to the financial year ending March 2013 but remained within regulatory levels. Deposits grew 52% in 9MFY13 but are concentrated with top five depositors accounting for 29% of total deposits. Any deposit outflows could further exacerbate current liquidity pressures and warrant a negative rating action.

Net interest margin (NIM) decreased to 9% in 9MFY13 (FY12:12%) as funding costs increased with higher borrowings. This, alongside an increase in operating costs, drove return on assets (ROA) to negative 2.3% in 9MFY13 from 2.9% in FY12. Fitch expects that maintaining NIM will remain challenging due to uncertainty over the terms for refinancing its securitisation loan maturing in 2013 and weak credit demand in the economy. MFP's profitability is likely to remain under pressure unless new branches break even and borrowing costs decline. Global rating agency Fitch also expects capitalisation to come under pressure unless loan growth is moderated and MFP resumes profitability.