Promoters to infuse fresh equity into Prime Finance to stay above minimum capital

As the licensed finance company sector is nearing its next minimum capital hurdle in a couple of months, Prime Finance PLC is to receive fresh equity by way of a rights issue from its parent to stay above the minimum core capital requirement which will step up to Rs.2.5 billion in January 2022 under the deferred time frame by the Central Bank.

Staying in line with its track record of providing continuous capital support, Prime Lands (Pvt) Limited, the country’s leading residential property developer, which owns 87 percent of Prime Finance PLC ,has given a commitment to infuse a further Rs.150 million in capital by way of a right issue.

Any shortfall between the post-right issue core capital and the minimum regulatory core capital is expected to be met with the company’s internal capital generation, according to ICRA Lanka Limited which reaffirmed the latter’s rating at BBB- with a Stable outlook.

While the company at present stays above the current regulatory minimum core capital requirement of Rs.2.0 billion with Rs.2.23 billion by March 31, 2021, on its financial yearend, the right issue and the internal profits have to make up for the balance Rs.300 million required during the 9 months when the elevated capital level comes into effect.

In the most recent financial quarter ended in June 2021, Prime Finance PLC reported earnings of 21 cents a share or Rs.25.2 million compared to a loss per share of 23 cents or Rs.18.4 million in the corresponding period in 2020.

Since acquiring the company in March 2017 and re-naming it to its current being, Prime Lands has consistently supported it with capital infusions with Rs.284 million in FY2018 came in via a rights issue, another Rs.864 million during FY2019 and a further Rs.527 million in December 2020. Besides the capital, the parent provides strategic and operational support to the company via corporate guarantees and a contingency funding line, ICRA Lanka said. Prime Finance’s capital adequacy ratios stands well above their minimum levels with its Tier I and Tier II capital ratios standing at 30.83 percent and 31.92 percent by June end when the regulatory minimums are at 6.5 percent and 10.5 percent respectively.

The company’s loans and leases portfolio of Rs.4.2 billion by June end is almost entirely asset backed with real estate backed exposure accounting for over 66 percent due to aggressive growth undertaken since the acquisition making the most of the group synergies, while the remaining portfolio accounting for vehicle leasing.

However, the current portfolio reflects moderation from the Rs.5.1 billion a year ago due to the challenging economic conditions created by the pandemic. While real-estate backed lending will continue to be a leading source of business going forward, the company has indicated its plans to expand its vehicle leasing portfolio through financing for 3-wheelers, a bane for the Sri Lankan economy unless and until alternative economic opportunities with better pay are created elsewhere in earnest to re-draw people from driving three-wheelers. An area of concern for the company is its asset quality where its reported gross non-performing loans ratio was at 20.21 percent by March 2021 compared to the licensed finance company sector average of 11.31 percent at the same time. This sourer asset quality is partly caused by the portfolio contraction and dour economic conditions. But, the collections had improved since April 2020, brining down the absolute gross non-performing loans from Rs.1.58 billion in June 2020 to Rs.1.0 billion in March 2021. However, the impact of the virus resurgence from April on the pace of collections and the asset quality is yet to be seen, ICRA Lanka said.