Indonesia Finance

Theindonesiatoday.com - Fitch Ratings has downgraded PT Sinar Mitra Sepadan Finance's (SMS Finance) National Long-term rating and rupiah-denominated senior bond I/2009 to 'BBB(idn)' from 'BBB+(idn)'. The outlook is stable. A National Short-term rating of 'F3(idn)' has also been assigned to SMS Finance.

At the same time, Fitch has assigned SMS Finance's proposed 370 days medium-term notes I/2011 of up to IDR200bn an expected rating of 'BBB(idn)(exp)'. The final rating on the issue is contingent on the receipt of final documents conforming to information already received.

The downgrade reflects deterioration in SMS Finance's asset quality due to rapid loan growth and weakening collection performance. Significant increases in credit costs in 2010-Q111 have also reduced profitability. Fitch notes that the rating may be downgraded further if asset quality shows significant deterioration from current levels.

SMS Finance's non-performing loan (NPL) ratio rose to 1.6% at end-Q111 from 0.8% in 2009, driven by its core business of car financing (94% of total loan portfolio at end-Q111). NPLs for car financing increased to 1.4% of total car receivables at end-Q111 (2009: 0.7%) as a result of rapid loan expansion in 2010. The weakened collection performance, following the spin-off of its motorcycle division into a new company, adversely impacted asset quality and worsened credit losses (net of charge-offs and loss on repossessed assets) in this particular segment in 2010. SMS Finance's total credit losses were high relative to peers at 4.3% of total net managed receivables at end-2010 (2009: 1.7%) with low provision cover at 9.6% of total NPLs at end-March 2011.

Motorcycle financing, which has a higher credit risk profile than car financing, accounted for 60% of total credit losses in 2010 and will be completely phased out by SMS Finance by 2012. Furthermore, the company is improving its IT collection system and expanding its collection team. This is reflected in the Stable Outlook.

SMS Finance's pre-tax return on assets (ROA) weakened to 1.7% in Q111 (2010: 2.4%) due to high provision charges despite stronger revenue growth from robust loan expansion. The company's pre-tax ROA is below peers' levels (around 6%-30%) mainly due to its higher credit costs.

SMS Finance's debt/equity ratio of 5.7x at end-Q111 (based on the Ministry of Finance's classification of subordinated loan from shareholder as equity) remained within the regulatory limit of 10x and reflects the use of substantial without-recourse joint financing from banks. SMS Finance plans to further raise capital by Q311 to partly finance its organic growth. However, Fitch notes the company's continued rapid loan expansion may increase its debt/equity ratio.

Established in 2000, SMS Finance focuses on the used-car financing business outside Java, especially in the Sumatra areas. It is ultimately owned by a few individuals through a holding company, PT Padma Terang Sentosa, which held a majority stake of 99.8% at end-March 2011. (Theindonesiatoday.com)