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Fitch says finance and leasing companies face challenges beyond COVID pandemic

Fitch Ratings yesterday warned that finance and leasing companies were facing challenges beyond the COVID-19 pandemic.

It said restrictions on vehicle importation would continue to constrain growth prospects of Sri Lankan finance and leasing companies (FLCs), dampening prospects for the sector’s earnings.

In a new report, Fitch said higher second-hand vehicle prices due to limited new vehicle supplies had reduced affordability and would most likely weaken future demand for vehicle financing.

Sri Lanka has banned vehicle imports since March 2020 to manage its already weak foreign-currency reserves. Fitch believes the ban is likely to remain in effect at least until the end of 2022.

This has caused surging demand for second-hand vehicles, inflating prices by around 50% depending on vehicle type. The higher prices have supported loan recoveries from repossession in the near term, but may expose FLCs to unexpected sharp price corrections.

Weaker growth prospects coupled with the economic and financial fallout from the pandemic have reduced Sri Lankan FLCs’ credit profiles. The industry’s total loans fell by 2.2% in the year to June 2021 (1QFY22), marking the fifth consecutive quarter of loan contraction for the industry.

The sector non-performing loans ratio, based on loans over six months past due, had climbed to 13.0% by end-1QFY22, against 7.7% at FYE19. Similarly, FLCs’ profitability remained under pressure with annualised return on assets narrowing to 1.8% in 1QFY22 from 2.8% in FY19 due to higher credit costs and declining top-line revenue. Capitalisation and liquidity metrics remained relatively stable due to the limited growth opportunities.

It said the Fitch-rated standalone FLCs largely possess adequate profit and capital loss absorption buffers relative to their rating levels to absorb higher credit costs, with the exception of Bimputh Finance PLC (B-(lka)/Rating Watch Negative). Its sustained losses continue to erode its capital base. Still, FLCs’ credit profiles are highly susceptible to the strength of the economic rebound, which could determine their ability to arrest deterioration in asset quality.

(FT)