ICRA Lanka Ltd. upgraded the issuer rating of Asia Asset Finance PLC (AAF) to [SL]A- from [SL]BBB +. ICRA Lanka has also raised the ratings of the broadcasts to [SL]A (SO) for the two R. AAF’s 1,000 million asset-backed secured debenture programs. In addition, ICRA Lanka also upgraded the rating of the program to [SL]A (SO) for Rs. 600 Million Asset-Backed Trusted Certificate Program AAF.
The letters SO in parentheses suffixed with a rating symbol represent structured bonds. The SO rating is specific to the rated issue, its terms and structure. SO ratings do not represent ICRA Lanka’s opinion on the general credit quality of the relevant issuer. The outlook for long-term ratings remains stable.
The stable outlook takes into account that ICRA Lanka expects AAF to continue to benefit from the strong parentage of Muthoot Finance Ltd. (MFL) and that the company continue to increase its exposure to relatively safer products such as gold loans. The outlook can be revised to “positive” if asset quality indicators and overall profitability improve, while maintaining adequate capital buffers. The outlook may be revised to “Negative” if AAF’s asset quality indicators deteriorate, profitability weakens or support falls below MFL’s expectations.
The rating improvements take into account the operational, financial and managerial support that AAF derives from being a 73% -owned subsidiary of MFL, rated by ICRA Ltd. at [ICRA]AA + (stable). MFL has demonstrated a good track record of providing financial and operational support to AAF over the past few years and achieved a rights issue of Rs. 414million in August 2021. This resulted in an improvement in tangible net worth for the company. AAF at Rs. 2.67 billion in September 2021, which was above the minimum regulatory requirement of Rs. 2.5 billion to be reached by January 2022. The rating also takes into account both capacity and willingness of parent entity, MFL, to provide timely capital support in the future. The upgrades also take into account the improvement in the overall quality of AAF’s portfolio, with its shift from unsecured loans to secured products such as gold loans.
ICRA Lanka is aware of the weak quality indicators of the company’s assets, mainly due to discontinued products such as small and medium enterprises (SMEs) and microcredit. The ratings also take into account the company’s moderate earnings profile with squeezing the net interest margin given its shift to relatively lower yielding secured loans. Going forward, AAF’s ability to control incremental slippages and improve overall profitability will be critical from a rating perspective.
AAF is a 73% owned subsidiary of MFL, which is the largest gold loan finance company in India. MFL has a proven track record in providing financial and operational support to the AAF over the past few years. During fiscal year 2019, MFL infused around Rs. 402 million via rights issue; which increased its stake to 73%. In addition, a rights issue of approximately Rs. 414million was completed in August 2021 in the form of preferred stock. MFL is represented by three directors on the eight-member board of directors. Operationally, MFL supports staff training, internal controls and risk management. ICRA Lanka noted that the parent company has the option of expanding additional capital support as needed.
In September 2021, AAF’s gross portfolio stood at Rs. 14,564 million compared to Rs. 14,026 million in March 2021. The company has gradually shifted its exposure to asset-backed loans over over the past three years, gold lending being the main asset class. Own loan products such as microfinance and working capital finance have been discontinued and account for around 20% in September 2021, up from around 60% in March 2017. In September 2021, gold loans represented around 57% of the total portfolio, while management intends to further increase its exposure to medium-term gold loans. ICRA Lanka is aware of the relatively low credit risk and higher liquidity of these gold loans, while taking note of the vulnerability to market risk resulting from fluctuations in the price of gold.
AAF reported a net worth of Rs. 2,671 million in September 2021 against a regulatory requirement of Rs. 2,000 million (Rs. 2,500 million by January 2022) following the issuance of preferred stock rights finalized in August 2021 of approximately Rs. 414 million. In terms of risk-weighted capital ratios, the core capital and total capital ratios remain well above regulatory requirements; amounted to 18.95% in September 2021 (16.75% in March 2021) compared to the regulatory requirement of 7% and 11%, respectively. ICRA Lanka expects the company’s capitalization profile to remain comfortable in the short to medium term.