CARE Ratings Nepal assigns CARE-NP Grade 4 to proposed 40% right issue of Jebil’s Finance

CRNL has assigned grading of ‘CARE-NP IPO Grade 4’ to the proposed Rights Share Issue of Jebil’s Finance Limited (JEFL). ‘CARE-NP IPO Grade 4’ indicates Below Average Fundamentals. CRNL assigns IPO grades on a scale of Grade 1 to Grade 5, with Grade 1 indicating strong fundamentals and Grade 5 indicating poor fundamentals. CRNL’s IPO grading is an opinion on the fundamentals of the issuer. The grade assigned to any individual issue represents a relative assessment of the ‘fundamentals’ of the issuer. JEFL has proposed 40% rights share issue of 23.11 lakh number of equity shares of face value of Rs.100 each at par aggregating Rs. 23.11 crore. The grading assigned to the rights share issue of Jebil’s Finance Limited (JEFL) is constrained by its volatile interest income and declining trend in net profit over the past 3 years and subdued financial performance during H1FY18(Provisional), high geographical and borrower concentration, high non-performing loans, albeit some improvement in Gross Non-Performing Loans ratio over the period, low level of CASA and high deposit concentration, exposure to regulatory risk related to finance industry and competition from other big finance companies and banks. The grading, however, derives strength from long track record of operation with experience board and management team, high Capital Adequacy Ratio, diversified product portfolio distribution in different sectors and growth in loans & advances and deposits over the period. Ability of the company to continue its growth momentum without compromising on asset quality, maintaining the Capital Adequacy Ratio and ability to manage the impact of any regulatory changes by NRB would be the key sensitivities. The net profit of JEFL has shown a declining trend over the last 3 years. The same declined by 11.88% during FY16 to Rs 4.3 crore over FY15 with a further decline of 15.55% to Rs 3.6 crore during FY17. The subdued net profit during FY17 was mainly due to decline in non- operating income and increase in operating expenses. On back of subdued net profit, JEFL’s Return on Total Assets (ROTA) has been declining over the period; it declined from 4.49% in FY15 to 3.48% in FY16 and further declined to 2.54% in FY17. However, the company’s interest spread increased from 2.14% during FY16 to 2.94% during FY17 due to high increase in Interest income/Avg. Interest earning assets (i.e. 209 bps to 11.15% over FY16) as compared to Interest cost/Average Borrowed Funds (i.e. 128 bps to 8.21% over FY16). JEFL’s Net Interest Margin (NIM) increased to 4.19% in FY17 from 3.20% in FY16 due to increase in net interest income was proportionately higher than the increase in average total assets. The grading is constrained by presence of large number of finance companies in the industry along with Commercial and Development banks conducting similar kind of businesses and lending at lower interest rate than finance companies due to their ability to raise lower cost funds. Further, the Banking and Finance industry in Nepal is exposed to changes in the various regulatory measures issued by NRB from time to time.