Bimputh Finance’s Outlook revised to Negative

Fitch Ratings Lanka has revised the Outlook on the National Long-term Rating of Bimputh Finance PLC (Bimputh) to Negative from Stable. At the same time, the agency has affirmed the National Long-term Rating at ‘Bb(lka)’.

The Outlook revision reflects the finance company’s high capitalimpairment risk arising from declining pre-impairment operating profit buffers amid a weakening in asset quality, reducing its capacity to absorb credit-cost shocks.

The revision also captures potential pressure on Bimputh’s financial profile from increasing exposure to the non-microfinance business as the company is still developing risk controls in this segment.

Bimputh’s rating reflects its highrisk appetite stemming from its substantial exposure to microfinance, which accounted for 50 percent of total lending at end-june 2018.

The higher-yielding microfinance segment tends to be more vulnerable to economic changes. Fitch expects microfinance to remain a dominant product for Bimputh although lending to this segment has declined.

The rating also captures the company’s heavy reliance on borrowings and potential capitalisation drag from weakening credit quality and strong loan growth aspirations.

Bimputh’s asset quality is likely to continue to be pressured by Sri Lanka’s challenging operating environment. The company’s reported non-performing loan (reported on a six-months-in-arrears basis) ratio rose to 6.4 percent by end-march 2018 from 3.0 percent a year earlier. This was despite a 5.7 percent net charge-off of average gross loans for the financial year ended March 2018 (FY18).

Fitch expects Bimputh’s mediumterm profitability to remain weak, weighed down by high credit and operating cost burdens and a lower share of high-yielding microfinance. The company’s pretax profit to average assets declined to 3.0 percent in FY18 from 9.7 percent in FY17.

Bimputh’s weak deposit franchise means it remains reliant on wholesale borrowings. The company’s deposit base is highly concentrated and stayed small at 26.9 percent of total funding at end March 2018.

Bimputh is a small finance company accounting for 0.7 percent of licensed finance-company and specialised leasing-company sector assets at endmarch 2018 (March 2017: 0.9 percent).