ICRA Nepal assigns IPO Grade Five to upcoming right issue of Central Finance

ICRA Nepal has assigned “[ICRANP] IPO Grade 5”, indicating poor fundamentals to the proposed rights issue amounting to Rs 26.03 crore of Central Finance Limited (CFCL). Instruments with this grading are considered to have poor fundamentals. ICRA Nepal assigns IPO grading on a scale of IPO Grade 1 through IPO Grade 5, with Grade 1 indicating strong fundamentals and Grade 5 indicating poor fundamentals. For the grading categories 2, 3 and 4, the sign of + (plus) appended to the grading symbols indicate their relative position within the grading categories concerned. Thus, the grading of 2+, 3+ and 4+ are one notch higher than 2, 3, and 4, respectively. CFCL has proposed to come out with 50% rights issue of 2,603,314.08 numbers of equity shares of face value NPR 100/- each, to be issued to its existing shareholders at par. The proposed issue is being made to augment the capital base and is a step towards ensuring revised (higher) paid up capital requirement set by Nepal Rastra Bank (NRB), the banking sector regulator. The lowest grade reflects CFCL’s weak assets quality (delinquencies were ~42% as of Jul-17 which spiked to ~65% as of mid-Oct-17 while reported gross NPLs remained low at ~2%) and moderate growth trend in advances so far (CAGR ~10% over last five years vs. ~20% for banking industry) resulting in much smaller asset base despite track record of more than 20 years in banking industry. Despite CRAR being strong at ~27% as of mid-Oct-17, which will further get augmented post the right issue, alignment of asset classification with NRB norms may jeopardize the capital ratios and profitability hence ability to purse future growth. Low franchise (seven branches as on mid-Oct-17) despite being a national level player also weakens the competitive positioning of the company and creates challenges in incremental growth prospects. If the asset quality improves going forward, CFCL would benefit from moderate cost of funds among peers emanating from fair CASA profile (~54% as on mid-Jul-17 against ~36% for industry). The grading also took into consideration the uncertain operating environment that the banks in Nepal are currently facing and also the relatively weak competitive positioning of CFCL, vis-à-vis commercial and development banks with finer lending rates, leading to relatively inferior borrower profile of CFCL. IPO Grade is not a recommendation to buy, sell or hold securities nor it is a comment on the price or valuation of securities.