Union Bank undertakes to infuse fresh capital if UB Finance fails to court outside investor

• Company slapped with deposit and lending caps as capital remains well under regulatory minimumÂ

UB Finance Limited (UBF) has yet again failed to meet the extended timeline given by the Central Bank, which lapsed on March 31, 2020, to meet the various statutory thresholds, including the one to bring in fresh capital to meet the minimum capital level required to operate as a finance company.Â

The company is therefore facing caps on the deposits it could raise and the loans it could give, as the Central Bank imposed restrictions on its business expansion until fresh capital comes, which it promised to bring fromÂ
an external investor.Â

However, ICRA Lanka revealed that UBF parent, Union Bank of Colombo PLC (UBC), had given an undertaking via letter to provide its beleaguered subsidiary with fresh capital, if attempts to infuse capital from an external investor did not materialise.Â

“ICRA Lanka notes that UBF requires immediate minimum capital support of around Rs.2,200 million to meet the regulatory core capital requirement of Rs.2,000 million by January 1, 2020 and Rs.2,500 million by January 1, 2021,” the rating agency noted, while reaffirming the company’s rating at BB, with a Negative outlook.Â

“ICRA Lanka takes into consideration the commitment from UBC via an undertaking letter that in case UBF is unable to secure capital from an external investor, then UBC would infuse capital, to meet the statutory capital requirements of UBF in 2020,” ICRA Lanka said in a rating report.Â

As of December 31, 2019, UBF had a core capital of Rs.435 million, compared to the then regulatory requirement of Rs.1.5 billion.  UBF’s capital deteriorated significantly since 2018, due to the poor profitability and an adjustment required as per the revised regulatory capital computation norms and very specifically, due to the one-time adjustment of Rs.430 million, on account of the IFRS-9 transition in March 2019.Â

“Consequently, in January 2019, the Central Bank of Sri Lanka placed a lending cap of Rs.9.8 billion (Rs.8.6 billion as in December 2019) and deposit cap of Rs.7.2 billion (Rs.6.3 billion as in December 2019) on the company,” the rating agency said.Â

The company has a total asset base of Rs.9.7 billion, as of December 2019, down from Rs.11.1 billion by March that year.Â

In September last year, UBC said it had engaged with discussions with identified investors to explore strategic options, which includes but not limited to divestment, merger, restructuring and spin-out for UBF.  Given that assurance, the Central Bank gave the company time till March 31, 2020, to meet its various statutory requirements, with capital being the foremost.  ICRA Lanka, part of Moody’s Investors Service, cautioned the company, if it fails to bring capital by end-June, it could lead to a correction in its rating.Â

Since the beginning of 2017, the Central Bank set minimum core capital requirements for finance companies and vowed with punitive action, including caps on deposit liabilities and borrowings, freeze on dividend payout and restrictions on business expansion on those who failed to meet the requirements.   According to the 2017 Central Bank circular, a licensed finance company was required to have a billion rupees in core capital by January 1, 2018, rising half a billion in the minimum requirement on every following year, until it reaches Rs.2.5 billion, on January 1, 2021.

However, last month, the Monetary Board gave a reprieve on finance companies’ capital in view of the shock stemming from the disruptions to the businesses from the pandemic and as such, it deferred the original timelines set for July 1, in 2020 and 2021, respectively, by one year.Â

Apart from the diminished capital levels, UBF had a non-performing loan ratio was at 17 percent, as of December 2019, significantly higher than the sector average of 10.78 percent.Â

In view of the potential impact from COVID-19 and moratoriums, ICRA Lanka foresees a substantial reduction in collections in the short term and a significant liquidity requirement to bridge the short-term liquidity gap.Â

The company has an unutilised funding line from its parent of Rs.900 million and expects further support if required, till stability returns after the present developments.Â

For the nine months ended in December 2019, the company posted a net profit of Rs.4.0 million, compared to Rs.12 million in the corresponding period in 2018.