Sri Lanka's Dialog Finance gets AA(lka) rating: Fitch

ECONOMYNEXT - Fitch Ratings said it has assigned Dialog Finance Plc a AA(lka) credit rating with a stable outlook despite its parent listed telco Dialog's AAA(lka) rating due to its small franchise, weak asset quality and profitability.

"(The) rating reflects Fitch's view that support would be forthcoming from (parent) Dialog Axiata PLC (Dialog), the largest mobile-telecommunication and pay-TV operator in Sri Lanka," Fitch Ratings said in a statement Tuesday.

Dialog Axiata has a 'AAA(lka)' credit rating from Fitch with a stable outlook.

Dialog closed unchanged at 11.80 rupees on Tuesday while Dialog Finance ended steady at 43 rupees.

Dialog Finance's rating is weaker than its parent's due to its small franchise, untested underwriting standards and weak asset quality as well as profitability, Fitch said.

Dialog Finance is expected to support Dialog's aspiration to expand its digital financial services in Sri Lanka via the fintech business model, leveraging on the parent's technical competencies.

"But we do not expect the segment to provide a material contribution to the group's core business in the medium term," the ratings agency said.

The fintech provides financing for the purchase of mobile phones and routers sold by parent Dialog.

"The device-financing business accounted for 24 percent of Dialog Finance's total loans at end-June 2018," Fitch said.

The company's asset-quality metrics are weaker than those of the industry average, mainly stemming from its legacy portfolio. Its gross non-performing loan ratio stood at 14.5 percent at end-June 2018, which was above the industry average of 6.8 percent.

Dialog had injected 599 million rupees in capital to the fintech in June 2018.

"We also expect Dialog to infuse capital at regular intervals to enable Dialog Finance to meet the enhanced regulatory minimum capital requirement of 2.5 billion rupees by 1 January 2021," Fitch said.

Fitch Ratings' statement in full:

Fitch Ratings Lanka Limited has assigned Dialog Finance PLC (DF) a National Long-Term Rating of 'AA(lka)'. The Outlook is Stable.

Key rating drivers: National ratings

DF's rating reflects Fitch's view that support would be forthcoming from Dialog Axiata PLC (Dialog), the largest mobile-telecommunication and pay-TV operator in Sri Lanka. The assessment is based on Dialog's 98.9% equity stake, DF's high operational and management integration with the parent and the common Dialog brand.

Dialog's credit profile and its ability to support DF is reflected in its 'AAA(lka)'/Stable rating, which is underpinned by its standalone strength. DF is rated two notches below its parent because of its limited importance to Dialog's core business as the subsidiary was only acquired in September 2017. DF would support Dialog's aspiration to expand its digital financial services in Sri Lanka via the fintech business model but we do not expect the segment to provide a material contribution to the group's core business in the medium term.

DF's synergies with the parent are high as its new business model is likely to leverage on Dialog's technical competencies. DF's management and operational integration with the parent is also likely to remain high. Fitch expects DF to initially focus on Dialog's subscriber base and is also likely to utilise Dialog's mobile platforms to support its financial transactions.

The company launched its new business model in April 2018 that provides financing for the purchase of devices such as mobile phones and routers sold by Dialog. The device-financing business accounted for 24% of DF's total loans at end-June 2018.

DF's standalone rating is weaker than its support-driven rating due to its small franchise, untested underwriting standards and weak asset quality as well as profitability. The company's asset-quality metrics are weaker than those of the industry average, mainly stemming from its legacy portfolio.

DF's reported regulatory gross non-performing loan ratio of 14.5% at end-June 2018 (end of financial year to 31 March 2018 (FYE18): 14.1%) was significantly above the industry average of 6.8%.

DF's capitalisation improved following an equity infusion of LKR599 million in June 2018, which saw the company's debt/tangible equity ratio fall to 0.8x at end-June 2018, from 2.2x at FYE18 (FY17: 2.0x). We expect its leverage to rise moderately amid its above-industry growth expectations, but its leverage is likely to remain better than peers in the medium term.

We also expect Dialog to infuse capital at regular intervals to enable DF to meet the enhanced regulatory minimum capital requirement of LKR2.5 billion by 1 January 2021 if DF's earnings generation is insufficient to comply with the requirement.

Rating sensitivities: National Rating

DF's ratings would be tied to changes in Dialog's National Long-Term Rating. A weakening of the links with its parent, including a meaningful reduction in parental control or influence and/or reduced importance to the group, could trigger a rating downgrade on DF.

Fitch believes a rating upgrade will most likely result from a significant increase in DF's role within the Dialog group.

(COLOMBO, 10 October 2018)