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ICRA upgrades rating of Asia Asset Finance

a year ago

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ICRA Lanka Ltd. upgraded the issuer rating of Asia Asset Finance PLC (AAF) to [SL]A- from [SL]BBB+. ICRA Lanka has also upgraded the issue ratings to [SL]A(SO) for the two Rs. 1,000 million asset backed secured debenture programmes of AAF. Further, ICRA Lanka has also upgraded the issue rating to [SL]A(SO) for the Rs. 600 million asset backed secured trust certificates programme of AAF.

The letters SO in parenthesis suffixed to a rating symbol stand for structured obligations. The SO rating is specific to the rated issue, its terms, and its structure. The SO ratings do not represent ICRA Lanka’s opinion on the general credit quality of the issuer concerned. The outlook on the long-term ratings remains Stable.

The Stable outlook factors in ICRA Lanka’s expectation that AAF will continue to benefit from the strong parentage of Muthoot Finance Ltd. (MFL) and the company will continue to increase its exposure to relatively safer products such as gold loans.  The outlook may be revised to “Positive” in case of improvement in asset quality indicators and overall profitability, while maintaining adequate capital buffers. The outlook may be revised to “Negative” in case of deterioration in AAF’s asset quality indicators, weakening profitability, or lower-than-expected support from MFL.

The rating upgrades factor in the operational, financial, and managerial support which AAF derives from being a 73% owned subsidiary company of MFL rated by ICRA Ltd. at [ICRA]AA+ (stable). MFL has demonstrated a good track record of providing both financial and operational support to AAF over the past few years and has completed a rights issue of Rs. 414 million in August 2021. This resulted in an improvement in AAF’s tangible net worth to Rs. 2.67 billion as of September 2021, which was higher than the minimum regulatory requirement of Rs. 2.5 billion to be met by January 2022. The rating also takes into account both the ability and willingness of the parent entity, MFL, to provide capital support on a timely basis, going forward. The upgrades also consider the improvement in the overall portfolio quality of AAF, with its shift away from unsecured lending to secured products such as gold loans.

ICRA Lanka is cognisant of the company’s weak asset quality indicators mainly on the account of discontinued products such as small and medium enterprise (SME) and micro-lending. The ratings also take note of the company’s moderate earnings profile with compression in net interest margin given its shift to relatively lower yielding secured lending. Going forward, AAF’s ability to control incremental slippages and improve overall profitability will be crucial, from a rating point of view.

AAF is a 73% owned subsidiary of MFL, which is the largest gold loan finance company in India. MFL has demonstrated a track record of providing both financial and operational support to AAF over the past few years. In FY2019, MFL infused about Rs. 402 million via rights issue; which increased its stake to 73%. Furthermore, a rights issue of around Rs. 414 million was completed in August 2021 in the form of preference shares. MFL is represented by three board members on the eight-member board. Operationally, MFL supports staff training, internal controls, and risk management. ICRA Lanka noted that the parent company has the ability to extend further capital support as and when required.

As at September 2021, AAF’s gross portfolio stood at Rs. 14,564 million vis-à-vis Rs. 14,026 million in March 2021. The company shifted its exposure towards asset backed lending gradually over the past three years, with gold loans being the key asset class. Clean lending products such as micro-finance and working capital financing have been discontinued and account to around 20% as at September 2021 in comparison to around 60% as at March 2017. As of September 2021, gold loans accounted for about 57% of the total portfolio, while the management intends to further increase its gold loan exposure over the medium term. ICRA Lanka takes cognisance of the relatively low credit risk and higher liquidity of these gold loans, while taking note of the vulnerability to market risk stemming from gold price fluctuations.

 

AAF reported a net worth of Rs. 2,671 million as of September 2021 as against a regulatory requirement of Rs. 2,000 million (Rs. 2,500 million by January 2022) following the rights issue of preference shares completed in August 2021 of around Rs. 414 million. In terms of risk-weighted capital adequacy ratios, the core capital and the total capital ratios remain comfortably above regulatory requirements; stood at 18.95% as on September 2021 (16.75% as on March 2021) as compared with the regulatory requirement of 7% and 11%, respectively. ICRA Lanka expects the capitalisation profile of the company to remain comfortable over the short to medium-term.

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