Fitch Ratings has reaffirmed LB Finance PLC’s National Long-Term Rating at ‘BBB+(lka)’ with a Stable Outlook. The rating reflects LB Finance’s solid financial standing, characterized by superior profitability and asset quality compared to its peers. However, the company’s significant exposure to market risk through its extensive gold-backed lending business offsets these strengths.
The rating also highlights LB Finance’s strong domestic presence, as it holds the position of Sri Lanka’s second-largest finance and leasing company (FLC), according to Fitch Ratings.
“The operational environment for Sri Lanka’s FLCs is showing signs of stabilization, with an uptick in GDP growth (1H24: 5.0 percent yoy; 2023: -2.3 percent), easing inflation, and lower market interest rates. This improved landscape should bolster credit growth, asset quality, and profitability across the sector. Additionally, the potential relaxation of vehicle import bans could further drive growth, although some risks around collateral value persist,” Fitch stated.
Fitch also expects that the stabilizing economy will help LB Finance maintain its business volumes, particularly in vehicle-backed financing and gold loans. As of the financial year ending in March 2024 (FY24), vehicle financing represented 48% of LB Finance’s gross loans, a slight increase from 47% in FY23 and a decline from 57% in FY22.
The company’s growth is likely to be further supported by the possible removal of vehicle import restrictions. Gold loans, which accounted for 44% of the loan book (FY23: 44%, FY22: 32%), are expected to gradually reduce as vehicle financing grows.
Fitch notes that LB Finance’s risk profile is heavily influenced by its exposure to gold-backed lending, which subjects the company to potential risks from gold price fluctuations. Growing competition in the gold-backed lending sector has also increased pressure on loan-to-value ratios and loan tenures. However, LB Finance has effectively managed these risks, maintaining solid asset quality through strong monitoring and control mechanisms.
The company has also enhanced its underwriting models, which Fitch views as a positive step for its risk profile. However, the true effectiveness of these improvements will only become apparent over time.
Fitch expects LB Finance’s loan book growth and recovery efforts to continue supporting its asset quality as the economic environment stabilizes. LB Finance’s gross impaired loans ratio (stage 3) stood at 4.1% at the end of FY24, a significant improvement from 8.6% in FY23, making it the lowest among Fitch-rated peers. This low ratio is largely supported by its gold-backed loan portfolio.
“We anticipate LB Finance will maintain stable asset quality unless there is a significant shock in gold prices. Even when excluding gold loans, we estimate LB Finance’s impaired loan ratio will remain below the sector average,” Fitch concluded.