Fitch Ratings has today affirmed 's (SFL) National Long-term rating at 'AA+(ind)' and National Short-term rating at 'F1+(ind)'. The Outlook is Stable. The agency has also affirmed its INR10.5b loan-term bank loans at 'AA+(ind)' and INR6b short-term bank loans at 'F1+(ind)'. Simultaneously, the agency has assigned an 'AA+(ind)' National Long-term rating to SFL's INR5bn non-convertible debentures programme.
SFL's ratings reflect its track record of steady performance through the cycles, reasonable financial flexibility and established franchise. Fitch notes the company's asset and geographical concentration risk and its 'highly decentralised decision making' operating model that may constrain its ability to grow in the long run.
In the current cyclical downturn, a fall in industrial activity led to lower capacity utilisation and cash flows of commercial vehicle operators falling significantly. While this caused some deterioration in asset quality (180 days past due Gross NPL Ratio: 1.75%), Fitch expects this to improve gradually with economic recovery. SFL's extensive experience has helped maintain fairly stable asset quality through the cycle, which in the agency's view supports the stability and predictability of earnings.
Fitch expects competition from banks to increase which, combined with an increasing proportion of cars and multi-utility vehicles in the loan portfolio would lead to a moderate reduction in net interest margin (NIM; 5.37%) over the medium term. However, NIM in FY10 should benefit from slightly higher yields from loans disbursed during a high interest rate environment. While SFL aspires to significantly increase fee income from the sale of third party products, it has yet to gain meaningful traction as activity in capital markets has just begun to improve. In Fitch's opinion, pressure on revenue growth and an increase in credit costs would lead to lower profitability (ROAA: 2.25%) in FY10. That said Fitch believes that strong linkages with various networks of commercial vehicle operators would provide SFL adequate opportunity to grow in the medium term.
SFL is adequately capitalized (capital adequacy ratio 14.65% is above regulatory minimum of 12%) and retained earnings may be sufficient to support modest growth target in the next 12 to 18 months. Fitch notes that SFL uses bilateral loan sell-down as a funding source (15%) and credit enhancement towards such transactions does not attract capital charge. However, if securitization norms were to be applied, SFL's capital adequacy ratio would be close to the regulatory minimum. SFL uses match-funded long-term bank loans which along with retail deposits ensure that adequate liquidity is maintained at all times.
SFL is one of the oldest asset finance companies in India, with a network of 450 branches. It has a strong franchise in the commercial vehicle segment, and in recent years has been increasing its focus on cars and multi-utility vehicles. It also has JVs with BNP Paribas in housing finance and asset management business, where it has majority stakes.
A detailed credit report on Sundaram Finance Limited will be available shortly on the agency's public website, www.fitchratings.com.
Fitch Ratings currently maintains coverage of approximately 6,000 financial institutions, including over 3,200 banks and 2,200 insurance companies. Finance & leasing companies, broker-dealers, asset managers, managed funds, and covered bonds make up the remainder of Fitch Ratings’ financial institution coverage universe.
Fitch India has Five rating offices located at Mumbai, Delhi, Chennai, Kolkata and Bangalore. Fitch is recognised by Reserve Bank of India, Securities Exchange Board of India (SEBI) and National Housing Bank.
