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ICRA reaffirms People’s Merchant Finance rating driven by capital infusion

06 Aug 2021

ICRA Lanka Limited has reaffirmed the issuer rating of People’s Merchant Finance PLC at [SL]B, while revising the outlook to stable from rating watch with developing implications. The rating factors in the recent capital infusion of Rs. 812 million via a rights issue, which enabled the company to meet the regulatory core capital requirement of Rs. 2 billion. As of March 2021, PMF reported a core capital of Rs. 2.1 billion, which puts the company above the current minimum core capital requirement of Rs. 2 billion. However, ICRA Lanka notes that the company needs to meet the upcoming capital hurdle of Rs. 2.5 billion by December 2021. The rating continues to take note of the company’s small scale of operations, the limited franchise, and modest asset quality. The limitations on the company’s funding diversity have been somewhat relaxed, post the recently completed rights issue, as the Central Bank of Sri Lanka (CBSL) removed the borrowing cap of Rs. 39 million and relaxed the deposit cap to Rs. 3.5 billion from Rs. 2.5 billion. ICRA Lanka would closely monitor the improvement in PMF’s capital structure to meet the next capital requirement, asset quality movement, and its overall financial performance going forward. The outlook may be revised to “Positive” in case of a steady improvement in the capital and earnings, as the portfolio expands, while keeping the asset quality under control. The outlook may be revised to “Negative” in case of a significant weakening in the asset quality, profitability, liquidity, or capital profile. Any regulatory action on the company, which could impact its business and financial performance, would also be a credit “Negative”. People’s Merchant Finance is a small-scaled licensed finance company with Rs. 4.7 billion asset base and a loan portfolio of Rs. 3 billion as of March 2021. PMF was incorporated in 1983 as an investment banking arm of Peoples Bank. Subsequently, the company became a licensed finance company with Peoples Bank and its subsidiary Peoples Leasing and Finance PLC being the main shareholders with 50.16% and 37.06% shareholding prior to May 2019. Sterling Capital Investment (Pvt.) Ltd. infused a total of Rs. 1.36 billion (Rs. 160 million through a private placement in March 2019 and Rs. 1.2 billion through a rights issue in May 2019) to become the main shareholder with a stake of 68.02% in May 2019. Following a further infusion of capital through a rights issue in March 2021, Sterling Capital Investment (Pvt) Ltd further increased its shareholding to 78.55% as it subscribed to Rs. 790 million of the total Rs. 812 million capital. Peoples Bank and Peoples Leasing and Finance PLC continue to maintain minority stakes of 10.36% and 7.65%  respectively as of March 2021. ICRA Lanka also notes the growth of the portfolio in FY2021 post the restructuring process. PMF reported a YoY growth of 67% in its gross portfolio in FY2021, and this was mainly through the safe asset classes such as gold loans and margin trading. The company’s portfolio consists of leasing (51%), loans (20%), gold loans (16%), and margin trading (13%) as of March 2021. PMF operates through a branch network of 11 branches.


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