Lanka Rating Maintains Instrument Rating of LOLC Finance PLC - LKR 05bn Unsecured Senior Redeemable Debentures, Assigns "Positive" Outlook

LOLC Finance PLC ("LOFC" or "the Company") maintains its very strong position as the largest Licensed Finance Company (LFC) in the sector. The Company's dominant position is underpinned by its association with LOLC Group that has diversified investments in several sectors. During FY24, LOFC's Net Interst Income (NII) surged to LKR~38bn, ~15.4% increase from FY23. The Company's core spread improved ~11% in FY24 (FY23: ~10%), in line with decreasing interest rates in Sri Lanka as liabilities were re-priced at lower rates. In terms of profitability, LOFC's Profit After Tax rose significantly by ~40%, reaching to LKR~21.6bn in FY24 (FY:23 LKR~15.4bn). This was on account of improved net interest income and substantial supplementary income. However, the Company's operational and non-markup expenses remain high in relevance to its total interest income. LOFC's core income constitutes ~73.8% of its total income, while its non-core income, including fair value gains from investment properties and government securities, and write-backs of provisions, makes up a significant share of ~26.2%. In terms of credit risk, the Company's NPL ratio remains below the industry average, with a 90-day gross NPL of ~13.86% and a net NPL of ~10.49% in FY24 but is higher than comparable peers. The rating incorporates the Company's solid capitalization with its Capital Adequacy Ratio, clocking in at ~23% in FY24 (FY23: ~21.71%), well above the regulatory requirement set by the CBSL.
The assigned "Positive Outlook" reflects the Company's improved performance indicators. Continuation of the growth momentum and sustenance of strong key performance and financial indicators are essential for an upgrade consideration. In addition, improvement in core income and rationalization of administrative expenses are imperative as the Company consolidates its position after series of mergers. The Company continues to be a vital profit-generating entity for the Group, therefore, the flow of funds to the Holding level is largely influenced by the Company's profitability. Significant slowdown in growth, rise in NPLs and reduction in total capital through dividends to lower capita augmentation will be negative for rating.

About the Entity
LOLC Finance PLC is registered as a Finance Company under Finance Business Act and also registered under the SEC to perform the functions of a Margin Provider. The largest shareholder of the Company is LOLC Ceylon Holdings PLC with an ownership of ~90.96%. The Board of Directors has seven members. The CEO, Mr. D M D K Thilakaratne has over 25 years of experience and is supported by a well-qualified and experienced management team.

About the Instrument
The LKR 5bn unsecured senior redeemable debenture was issued by CLF, which was transferred to LOFC following the merger. The issue consists of two types of debentures. While Type A offers a fixed rate of 10.5% paid bi-annually, Type B provides a bi-annual payment with a floating rate of a six-month treasury bill rate + 425bps, without a cap. The objective of the issue was refinancing of existing borrowings and financing of working capital requirements of CLF. It carries a tenor of five years, and the principal will be repaid at the end of the tenor.