ECONOMYNEXT – Sri Lanka-based Asia Asset Finance PLC’s (AAF) national long-term rating of ‘A+(lka)’ with a stable outlook has been affirmed by Fitch Ratings.
Fitch also affirmed AAF’s secured and senior unsecured debentures at ‘A+(lka).
AAF’s rating is driven by expectation that its parent, India-based Muthoot Finance Ltd (MFL, BB/Stable), would provide extraordinary support if required, the rating agency said.
“We expect the operating environment for Sri Lankan finance and leasing companies to continue to stabilise following the inflation and interest-rate shocks over the past two years. Easing inflation and interest-rate pressure should create steadier conditions for sector performance,” Fitch said.
The full statement is reproduced below:
Fitch Affirms Asia Asset Finance at ‘A+(lka)’; Outlook Stable
Fitch Ratings – Colombo/Mumbai – 28 Feb 2025: Fitch Ratings has affirmed Sri Lanka-based Asia Asset Finance PLC’s (AAF) National Long-Term Rating of ‘A+(lka)’ with a Stable Outlook. Fitch also affirmed AAF’s secured (asset backed) and senior unsecured debentures at ‘A+(lka).
Key Rating Drivers
Support-Driven Rating: AAF’s rating is driven by our expectation that its parent, India-based Muthoot Finance Ltd (MFL, BB/Stable), would provide extraordinary support if required. MFL’s ability to support AAF is underpinned by its standalone profile as India’s largest gold-backed lender, proven execution record and considerable resources relative to AAF’s balance sheet. Our support assessment also takes into account MFL’s 72.9% shareholding of AAF, record of ordinary equity support and the strategic and operational alignment between the parent and subsidiary in their core product – gold-backed loans.
Limited Subsidiary Role: AAF’s rating is constrained by its minor role and low contribution to MFL group. It accounts for less than 1% of the group’s assets and net profit, operates in a different geography and regulatory environment and exhibited volatile performance amid Sri Lanka’s recent economic challenges. We regard AAF as less critical to MFL than the parent’s other financing subsidiaries in India.
Product and Strategy Integration: AAF’s aligns its business model with MFL’s core product of gold-backed loans, which comprised around 70% of AAF’s net loans in the third quarter of the financial year ending March 2025 (3QFY25). We expect gold-backed loans to remain central to AAF’s operations, even as it seeks to diversify its product mix. MFL provides input on AAF’s strategy and execution through representation on AAF’s board and the secondment of four executives to AAF. However, execution differences remain, due to the companies’ distinct jurisdictions and local market practices.
Record of Ordinary Capital Support: MFL has provided timely and sufficient ordinary capital to AAF when needed since its acquisition in 2014. Total capital support has exceeded LKR800 million to facilitate AAF’s business growth and meet increased minimum regulatory capital requirements.
Weak Standalone Profile: We assess AAF’s standalone credit profile to be weaker than its support-driven rating, due to its modest franchise, at 1.8% of finance and leasing sector assets and deposits, and high debt/tangible equity ratio (end-3QFY25: 7.7x, FYE24: 6.5x), while exhibiting a higher-risk appetite. The company’s delinquency ratio also exceeds the sector average, due to the significantly higher non-performing loans in its legacy non-gold loan book.
Stabilising Economic Outlook: We expect the operating environment for Sri Lankan finance and leasing companies to continue to stabilise following the inflation and interest-rate shocks over the past two years. Easing inflation and interest-rate pressure should create steadier conditions for sector performance. Sri Lanka’s economy expanded by 5.2% in the year to September 2024, from a contraction of 4.5% in the year to September 2023. We expect domestic economic activity to keep improving as GDP expands.
Expanding Franchise: AAF’s market share has steadily increased since FY21, despite challenging operating conditions; its market share, measured by total assets, reached 1.8% in 2QFY25, from 1.1% at end-FY21. This was led by a surge in gold-backed lending and, more recently, the expansion of micro-mortgage loans against residential property, which also helped to moderate the concentration risk stemming from gold-backed lending.
Improving Profitability: AAF’s annualised pre-tax return on assets rose to 3.0% in 9MFY25 (FY24: 1.9%), driven by reduced funding costs, as short-term deposits repriced downwards more quickly than loan receivables amid declining market interest rates. Profitability was also supported by increased business volume on improving credit demand, which boosted interest and other income.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
AAF’s rating is sensitive to changes in MFL’s credit profile as well as Fitch’s assessment of the parent’s ability and propensity to extend timely extraordinary support. Developments that could lead to negative rating action and potentially a multiple-notch downgrade include:
— Significant reduction in the parent’s ownership, control or influence that could weaken its propensity to support AAF
— Weakening alignment of AAF’s gold-loan practices with its parent’s policies, signifying reduced integration
— Weakening performance or meaningful deviation on strategy that suggests AAF may no longer meet MFL’s objectives for the subsidiary on a sustained basis
— A notable decline in AAF’s capital buffers, indicating reduced timeliness in providing extraordinary support
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
— An enhanced strategic importance for AAF within MFL group, including a meaningful increase in asset and profit contribution
— Significant increase in integration with MFL across various functional areas that suggests an enhanced role and relevance for AAF
— Expanded use of the Muthoot brand name beyond the gold-loan product that significantly increases reputational risk to MFL in the case of AAF’s default
However, we do not expect major near-term developments in these aspects in light of AAF’s small size relative to MFL and its operation in a different jurisdiction.
DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS
AAF’s secured (asset backed) debentures are rated at the same level as its National Long-Term Rating in accordance with our criteria. This is because the secured debenture holders rank higher in priority to all other unsecured creditors and any preference and ordinary shareholders of the company. We have not provided any rating uplift for the asset-backed securities, as we assess recovery prospects as average and comparable to those of AAF’s unsecured debt under Sri Lanka’s developing legal system. A default by AAF would constitute an event of default on the debentures.
AAF’s senior unsecured debentures are rated at the same level as its National Long-Term Rating, as they constitute its direct, unconditional, unsecured and unsubordinated obligations.
DEBT AND OTHER INSTRUMENT RATINGS: RATING SENSITIVITIES
The debt ratings will move in tandem with any rating action on AAF’s National Long-Term Rating.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Public Ratings with Credit Linkage to other ratings
AAF’s National Long-Term Rating is linked to MFL’s credit profile, taking into account relativities with other entities rated on the Sri Lankan national rating scale.
ESG Considerations
Not applicable.
(Colombo/Feb28/2025)
