Fitch Ratings has downgraded Abans Finance PLC's National Long-Term Rating to 'BBB+(lka)', from 'A-(lka)'.
The rating remains on Rating Watch Negative (RWN).
Key Rating Drivers
Weakening Parent Ability to Support: The downgrade reflects our view that a probable default on the sovereign's local-currency obligations elevates credit, funding and liquidity stresses for the financial sector, including Abans Finance. Together with the tight liquidity at its parent, Abans PLC (AA-(lka)/Negative), this weighs on the parent's ability to extend extraordinary support to the finance company in a timely manner.
We also believe that the parent's propensity to support Abans Finance is weak, given its intentions to dispose of the entity despite having met all regulatory capital requirements. Abans Finance was classified as 'Held for sale and discontinued operations' in Abans' financial statements as of end-December 2022.
Support Remains Driver: We continue to factor in shareholder support for Abans Finance, as Abans remains the largest shareholder following the recent capital infusion and is involved in Abans Finance's strategic decisions through board representation, as well as common branding, despite the potential for disposal.
RWN Maintained: The RWN reflects the potential for further deterioration in Abans Finance's creditworthiness relative to other entities on the Sri Lankan National Ratings scale amid sustained pressure on the domestic operating environment arising from the stressed sovereign credit profile. We see the funding and liquidity conditions of domestic finance and leasing companies (FLC) as tied to those of the banks, and any signs of funding or liquidity stress in the banking sector would carry contagion risk for FLCs.
The RWN reflects our view that Abans Finance is not immune to these system-wide stresses, which will continue to exert pressure on the prospects for parental support.
Thinning Liquidity Buffers: The resumption in lending in the third quarter of the financial year ending March 2023 (FY23) resulted in Abans Finance's share of liquid assets in total assets declining to 11.6% at end-3QFY23 from 16.6% at end-2QFY23. We expect the company's focus on loan book growth funded by short term deposits to elevate liquidity risks, particularly in light of potential credit and liquidity stresses in the system should domestic operating conditions deteriorate further.
Materially Weak Standalone Profile: We believe Abans Finance's intrinsic financial strength is significantly weaker than its support-driven rating, reflecting a small franchise, limited operating history, high risk appetite and weak financial profile. Abans Finance's asset quality metrics are some of the weakest among Fitch-rated peers. Its regulatory non-performing loans ratio (over four months due) was 23.3% at end-September 2022, and we expect defaults to rise further as borrower repayment capacity rapidly deteriorates in the challenging operating environment.
Rating Sensitivities
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Abans Finance's rating is sensitive to changes in Abans' credit profile, as well as Fitch's opinion around Abans' ability and propensity to extend timely extraordinary support.
Developments that could lead to negative rating action, including the possibility of a multiple-notch downgrade, include:
A continued decline in Abans' liquidity position that further reduces its ability to provide any needed financial support to Abans Finance
A significant increase in Abans Finance's size relative to that of the parent which makes extraordinary support more onerous for the parent
Insufficient or delayed liquidity support from Abans relative to Abans Finance's needs that hinders Abans Finance's ability to meet its obligations in a timely manner
Intervention by authorities that constrain Abans Finance's ability to service its obligations
Any further weakening in Abans' propensity to support Abans Finance may result in the removal of parental support and lead to a downgrade. If institutional support cannot be relied on or the rating based on institutional support falls below the rating based on standalone strength, we would reassess the rating based on Abans Finance's Standalone Credit Profile, which is multiple notches below its current support-driven rating.
Should a disposal plan materialise, the introduction of a new core shareholder with a weaker credit profile than that of Abans could also lead to a downgrade, which may be more than one notch.
The resolution of the RWN is contingent upon developments in the operating environment, the parent's credit profile and the evolution of the finance company's funding and liquidity position, which may take more than six months to emerge.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
There is limited scope for positive rating action given the RWN. However, if a disposal plan materialises and the new core shareholder has stronger support ability and propensity than that of Abans, it could lead to an upgrade.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Public Ratings with Credit Linkage to other ratings
Abans Finance's rating is driven by Abans' National Long-Term Rating.
Report of Issuer's Appeal
The issuer appealed the decision of the original rating committee. The issuer provided the following basis for the appeal: additional commentary on parental support for Abans Finance and macroeconomic stability in Sri Lanka.
In accordance with Fitch's policies, the issuer's request was reviewed by an appeal review panel, which determined that an appeal committee was not warranted due to insufficient new information.
Therefore, the outcome of the original committee, as detailed within this rating action commentary, was not affected.
RATING ACTIONS
Entity / Debt
Rating
Prior
Abans Finance PLC
Natl LT
BBB+(lka)
Downgrade
A-(lka)
Page
of 1
VIEW ADDITIONAL RATING DETAILS
This report was prepared by Fitch in English only. The company may prepare or arrange for translated versions of this report. In the event of any inconsistency between the English version and any translated version, the former shall always prevail. Fitch is not responsible for any translated version of this report.
Additional information is available on www.fitchratings.com
ABANS FINANCE PLC 
