Fitch publishes Ideal Finance’s first-time ‘B+(lka)’ rating; Outlook Stable

Fitch Ratings Lanka has published Ideal Finance Limited’s National Longterm Rating at ‘B+(lka)’ with a Stable Outlook.

Ideal Finance’s rating reflects its small and developing franchise and limited operating history. The rating also captures the company’s high-risk appetite with significant exposure to the more vulnerable consumer segment and non-core realestate investments.

Fitch sees the company’s exposure to real-estate investments - which constituted 14 percent of equity at the end of the financial year ended March 2018 (FYE18) - as risky due to their cyclical nature.

Fitch expects Ideal Finance’s large unseasoned loan book to continue exerting pressure on asset quality, following rapid loan growth over the previous few years. The gross regulatory nonperforming loan ratio of 1.5 percent at FYE18 was better than that of higher rated peers.

Fitch expects the company’s leverage ratio of 1.9 percent, as measured by debt/tangible equity, to be pushed up in the medium term by sustained strong loan growth, which is insufficiently supplemented by internal capital generation, although it was better than that of higher rated peers.

“We expect capital support from Ideal Finance’s main shareholders - Aravinda De Silva and Nalin Welgama - to help the company meet the enhanced regulatory minimum capital requirement of Rs.1.5 billion by end-2019,” Fitch said. Ideal Finance relies on bank borrowings and equity to fund its operation. It has a small and concentrated deposit base, which accounted for 19 percent of total funding in FY18, owing to its short operating history, having commenced operations in 2012.

The company accounted for less than 1 percent of total non-bank financial institution sector assets in FY18, with vehicle financing making up around 80 percent of its total gross loans.