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Fitch Ratings – Colombo – 10 Jun 2020: Fitch Ratings has revised Serendib Finance Limited’s National Long-Term Rating to ‘AA-(lka)’, from ‘A+(lka)’, with a Negative Outlook, and that of Richard Pieris Finance Limited (RPF) to ‘A-(lka)’, from ‘BBB+(lka)’, with a Stable Outlook. Fitch has also affirmed Dialog Finance PLC’s (DF) National Long-Term Rating at ‘AA(lka)’ with a Stable Outlook.
Dialog Finance PLC
DF’s rating reflects Fitch’s expectation of support from parent, Dialog Axiata PLC (Dialog, AAA(lka)/Stable), Sri Lanka’s largest mobile-telecommunication and pay-TV operator. This is based on Dialog’s 99% equity stake, DF’s high operational and management integration with the parent and the common Dialog brand. The two notch differential reflects our view that DF is of limited importance to Dialog’s core business, given its evolving fintech business model as well as modest size and financial contribution to the group. Dialog’s credit profile and ability to support DF is reflected in its rating, which is underpinned by its standalone strength.
DF was acquired in 2017 to support Dialog’s aspiration to expand its parent’s digital financial services in Sri Lanka via the fintech business model. However, DF is yet to commence its intended role and we do not expect the segment to provide a significant contribution to the group’s core business in the near to medium term.
We believe DF’s intrinsic financial strength is materially weaker than its support-driven rating due to its poor financial profile, small franchise – with market share of around 1% – short operating history and high risk appetite. Device financing is DF’s core product, accounting for 44% of its gross loan book and 54% of DF’s stage 3 loans at end-2019. DF has weak asset-quality metrics, with a stage 3 loan/gross loan ratio of 40.1% and a regulatory six-month non-performing loan ratio of 35%. We expect asset-quality metrics to remain under pressure in the near-term due to the coronavirus pandemic and the already-challenging operating environment. This is likely to increase credit costs and further weaken DF’s profitability.
DF’s debt/tangible equity fell to 0.4x in 1Q20, from 0.6x in 2019, having received LKR701 million of rights issue subscription funds from its shareholders in March 2020 to meet the LKR2 billion regulatory minimum. We expect Dialog to infuse the balance amount to enable DF to reach the regulatory core capital level of LKR2.5 billion by end-2021. We forecast the company’s leverage to remain stable, as its lending plans are likely to be mostly funded by equity capital rather than debt and deposits.
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