Fitch says finance and leasing companies more susceptible to interest-rate risk

Any signs of funding or liquidity stress in banking sector would carry contagion risk for FLCs’

Fitch believes that finance and leasing companies (FLCs) are more susceptible to interest-rate risk in the currently rising interest rate environment, as their mostly fixed-rate loans reprice more slowly than their liabilities.Fitch Ratings said so when they announced that they have maintained Sri Lanka-based People’s Leasing & Finance PLC’s (PLC) National Long-Term Rating of ‘A+(lka)’ on Rating Watch Negative (RWN).

“The RWN reflects potential deterioration in the finance and leasing company’s creditworthiness relative to other entities on the Sri Lankan national rating scale, given the heightened stress on its funding and liquidity. We see the funding and liquidity conditions of domestic FLCs as tied to those of the banks. This is due to the direct funding and deposit relationships as well as the banking sector’s importance to the financial system. We believe any signs of funding or liquidity stress in the banking sector would carry contagion risk for FLCs,” Fitch said.

“The credit profiles of FLCs are under pressure from Sri Lanka’s (Long-Term Local-Currency Issuer Default Rating: CCC (Under Criteria Observation)) challenging operating environment, with significant near- to medium-term downside risk presented by the weakened sovereign credit profile. This could further impair the economy and weigh on financial market performance, damaging the asset quality and earnings of FLCs,” Fitch observed.

Referring to People’s Leasing & Finance PLC it said,” PLC’s business profile is supported by its domestic franchise as the country’s second-largest FLC, with a market share of 11% of total FLC-sector assets at end-June 2022, benefiting from links to its 75% parent, state-held People’s Bank (Sri Lanka) (PB, AA-(lka)/RWN). However, we believe PLC’s business profile is vulnerable to the intensifying risks in the domestic market, similarly to peers, which may limit its ability to generate and defend business volume in the medium term.”

They further said: We expect key asset-quality metrics to deteriorate, similarly to those of peers, in the financial year ending March 2023 (FY23) and believe this may extend into FY24 owing to the weak operating environment. Pressure is likely to emanate from high interest rates, rising inflation and the prolonged impact of the economic contraction. Deterioration is already evident in PLC’s elevated loan impairment charge of 4.0% of average gross loans at end-1QFY23, compared with an average of 1.5% in FY20-FY22.”