Fitch Ratings has placed Sri Lanka-based Dialog Finance PLC's (DF) National Long-Term Rating of 'AA(lka)' on Rating Watch Negative (RWN).

Key Rating Drivers

Elevated Downside Risks: The RWN reflects the potential for deterioration in DF's creditworthiness relative to other entities on the Sri Lankan national rating 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 as tied to those of the banks; signs of funding or liquidity stress in the banking sector would carry contagion risk for finance and leasing companies.

The RWN on DF's rating reflects our view that DF is not immune to these system-wide stresses, despite parental support.

Shareholder Support Drives Rating: DF's rating is driven by our expectation that Dialog Axiata PLC (AAA(lka)/Stable) - the parent and Sri Lanka's largest mobile telecommunication and pay-TV operator - would provide extraordinary support to DF, if required. Dialog's credit profile and ability to support DF is reflected in its rating, which is underpinned by its standalone strength. Our support assessment also takes into consideration Dialog's 99% equity stake in DF, the subsidiary's high operational and management integration with the parent and the common Dialog brand.

Limited Importance to Parent: We believe DF is of limited importance to Dialog's core business because of its evolving fintech business model, as well as modest size and negligible financial contribution to the group. DF was acquired in 2017 to support Dialog's aspiration to expand into digital financial services, but delays in obtaining regulatory approvals together with a weak economic environment have disrupted the launch of its fintech services.

Weak Standalone Credit Profile: We regard DF's standalone credit profile as being weaker than its support-driven rating because of its smaller franchise, evolving business model and weak financial profile relative to higher-rated peers. The company's funding profile is the weakest among Fitch-rated Sri Lankan finance and leasing companies due to its concentrated deposit base, which comprises a high share of related-party deposits.

DF's significant loan exposure to Dialog's ecosystem cushions the company against potential asset-quality deterioration relative to peers, as it provides greater visibility into the borrowers' cash flow and revenue streams.

Rating Sensitivities

Factors that could, individually or collectively, lead to negative rating action/downgrade:

DF's rating is sensitive to changes in Dialog's credit profile, as well as Fitch's opinion around Dialog's 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:

insufficient or delayed liquidity support from Dialog relative to DF's needs that hinders DF's ability to meet its obligations in a timely manner

intervention by authorities that constrain DF's ability to service its obligations

meaningful reduction in the parent's ownership, control or influence that could weaken Dialog's perceived propensity to support DF

The resolution of the RWN is contingent on 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 upward rating action given the RWN. The resolution of the RWN with an affirmation could be driven by our view that funding stress related risks have abated in the sector, to the extent that we believe DF's ability to service its obligations in local currency is not hindered.

Significant increase in DF's role in the group over the longer term, demonstrated by successfully expanding its fintech business, as intended by the parent, with a rising financial contribution to the group, could lead to an upgrade of the National Long-Term Rating.

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

DF's rating is driven by support from the parent, Dialog.

RATING ACTIONS

Entity / Debt

Rating

Prior

Dialog Finance PLC

Natl LT

AA(lka)

Rating Watch On

AA(lka)

Page

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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

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