Softlogic Securities Brokers of Sri Lanka Get [SL]CIFAR BBB rating

Softlogic Securities Brokers of Sri Lanka Get [SL]CIFAR BBB rating

ECONOMYNEXT – Softlogic Stock Brokers (Pvt) Limited of Sri Lanka has received a [SL]BBB national rating by ICRA Lanka.

The rating took into account that the stockbroker’s parent company was Softlogic Capital Plc, rated [SL]BBB+ and had a clientele among high net worth individuals and foreign investors.

It had a risk-weighted capital adequacy ratio of 310% as of March 21, remaining well above the regulatory minimum of 120%.

“The rating remains constrained by the Company’s moderate profitability with an average net margin [1]by 0.19% in the four years to fiscal 2020,” the rating agency said.

“ICRA Lanka is also cognizant of the volatility inherent in the company’s core business and the intense competitive intensity in the industry.

“ICRA Lanka notes that market share shed in fiscal year 2021, despite recording higher volumes in the same period, mainly due to strong competition in the retail segment.”

The full statement is reproduced below:

Rating action

ICRA Lanka Limited has assigned the issuer rating of [SL]BBB (pronounced SL triple B) with a stable outlook
for Softlogic Stock Brokers (Pvt) Limited (SSB or the Company).

Reasoning

The rating takes into account SSB’s filiation as a subsidiary of Softlogic Capital PLC, (rated
[SL]BBB+), its track record in equity brokerage and its established position, its strong franchise in key segments such as
the High Network (HNW) and foreign institutions.

The rating also takes into account the Company’s adequate capitalization profile with a risk-weighted capital adequacy ratio of 310% as of March 21, remaining well above the regulatory minimum of 120%. ICRA Lanka also notes the Company’s comfortable levels of exposure to receivables.

The rating remains constrained by the Company’s moderate profitability with an average net margin 1 of
0.19% in the four years to fiscal year 2020.

ICRA Lanka is also cognizant of the inherent volatility of the company’s core business and the intense competitive intensity of the industry.

ICRA Lanka notes that the market share shed in fiscal 2021, despite registering higher volumes in the same period, mainly due to strong competition in the retail segment.

Outlook: stable

ICRA Lanka believes that SSB’s current capitalization profile, together with the planned support from Softlogic Capital PLC, supports its medium-term growth plans.

The outlook may be revised to “Positive” in the event of
constant improvement of the Company’s capitalization profile and profitability.

The outlook may be revised to ‘Negative’ if earnings and capitalization levels deteriorate.

Main rating factors

Credit strengths
Part of the diversified Softlogic Holdings conglomerate, with access to management and capital support
of the group: Softlogic Stock Brokers (SSB) is a 100% subsidiary of Softlogic Capital PLC (rated
BBB+ On Watch by ICRA Lanka), which in turn is a subsidiary of Softlogic Holdings PLC (rated BBB Negative).

The Softlogic Group focuses on four main sectors, retail, healthcare, financial services and
TIC.

SCAP is the holding company for the financial services segment of the group.

ICRA Lanka expects equity brokerage to be of strategic importance to the group, as part of its broader financial services offering, which includes life insurance, non-banking financial services and asset management. of assets.

SSB has access to group management and capital support, management expertise, systems and controls and shared services.

ICRA Lanka expects parent company SCAP to support the regulatory and growth capital needed for the
securities brokerage entity if necessary.

Strong business franchise, especially among foreign and HNI clients: SSB is a leading player in the stock brokerage industry in Sri Lanka, with a strong franchise in the foreign and High Networth Individual (HNI) segments.

Over the period from fiscal 2017 to fiscal 2020, the company held a leading position with a market share of approximately 8-14%. The company’s market position, however, fell in fiscal 2021.

This is largely due to its limited focus on the retail segment, which has been the driving force behind the industry’s strong overall revenue growth during this period, while the foreign segment (a key element
domain for the Company) remained moderate.

Adequate capitalization profile, however, the ability to extend credit is somewhat capped by the availability of capital:

SSB’s risk-adjusted capital adequacy ratio stood at 310% as of March 21 (230% in March 20), compared to the regulatory minimum of 120%. In addition, the Company has registered liquid capital of LKR 212 million,
compared to the regulatory minimum of 35 Mn for approved brokerage firms. However, ICRA Lanka notes that the Company’s margin (customer credit) exposures remain somewhat capped by the regulatory net capital position, which dictates the maximum obligor exposure by an investment dealer.

SSB’s margin/debtor exposure as of March 21 was 452m, compared to the regulatory cap of LKR 506m, indicating a limited buffer.

Debt ratio as of Mar 21 was 1.37x where it went from 0.55x from Mar 20 as the company took on additional debt (Total debt increased from LKR 112m as of Mar 20 to
LKR 272 Mn on Mar 21) to fund its margin exposures.

Going forward, it will be crucial for SSB to improve its distribution
franchise, as foreign participation in the market, at least in the short term, is expected to be moderate.

Credit challenges
Performance is highly cyclical depending on overall market performance:

On average, about 85% of SSB’s total operating revenue comes from brokerage commissions, so overall revenue and profitability are highly sensitive to overall market performance.

ICRA Lanka notes that SSB’s overall profitability over the past 4 years to FY2021 has been quite modest, with an average net margin of 0.19% over the 4 years to FY2020 .

However, in the 2021 financial year, the company recorded a PAT of LKR 95 million
(net margin of 22.77%) thanks to the strong post-COVID market recovery during the second half of the financial year.

ICRA Lanka notes that the company’s ability to diversify its revenue base is somewhat limited, as the scope for expansion of margin exposures is capped by regulatory standards and the company
does not engage in proprietary trading or other mergers and acquisitions advisory work.

Increased competition affecting the Company’s overall market share: ICRA Lanka notes that SSB faces competition from brokerage houses that are part of well-established investment banking groups.

In fiscal 2021, SSB’s limited traction in the retail segment led the company to cede market share to the
competetion.

The rating notes the steps taken by the Company to better penetrate the retail market, increasing brand awareness and introducing more retail-friendly digital trading solutions.

However, ICRA Lanka expects competitive pressure to be high in the short to medium term, as foreign participation (which is a core segment of SSB) in the market is expected to be moderate.

About the company

Softlogic Stock Brokers (Pvt) Limited (SSB) was incorporated in 2010 and is a leading stock brokerage firm in Sri Lanka with a trading license from the Securities and Exchange Commission (SEC).
It is a wholly owned subsidiary of Softlogic Capital PLC, the financial services holding company of the Softlogic Group
segment.

SSB mainly focuses on High Networth and Overseas customers, and has held a leading position in the market in recent years.

Dolores W. Simon