Fitch affirms Ceylease Financial Services at ‘BB+’; Removes from Rating Watch Evolving

Wednesday, 28 March 2012 00:02 - - {{hitsCtrl.values.hits}}

Fitch Ratings Lanka has affirmed Ceylease Financial Services Ltd’s (CFSL) National Long-Term rating at ‘BB+(lka)’. The rating has been removed from Rating Watch Evolving (RWE) and assigned a Stable Outlook.

The rating has been uplifted based on Fitch’s expectations of support from CFSL’s parent, the state-owned Bank of Ceylon (BOC; ‘AA+(lka)’/Stable). BOC has a 55% shareholding in CFSL, and is represented on the latter’s board. Further, BOC continues to be a key creditor to CFSL, accounting for 28% of its total borrowings at end-2011. The removal of the RWE, which was placed on 26 July 2011, follows Merchant Bank of Sri Lanka Plc’s (MBSL, 72% owned by BOC) 15 March 2012 announcement that it would not proceed with its proposed merger with CFSL and other entities of the BOC group.

Fitch notes CFSL’s weak stand-alone financial profile. The company mainly provides vehicle finance, in the form of leases (37.1%), hire purchase (49.6%) and loans (13.3%) at end-2011. During 2011, the company wrote off LKR104m of non-performing loans (NPLs) that were fully provided. Consequently, its NPL ratio declined sharply to 15.4% over three months in arrears and 6.9% over six months in arrears at end-2011 from 25.1% and 13%, respectively, in end-2010.

Profitability as measured by pre-tax return on assets (ROA) increased to 3.9% in 2011 (2010: 1.6%), largely supported by non-recurring income in the form of interest income on commercial papers and recoveries of NPLs. However, pre-tax ROA excluding the non-recurring items remained weak at 1.5% at end-2011 compared with peers. Investments in equity trading portfolio increased to 41% of equity at end-2011 (2010: 35%) and investments in real estate stock accounted for 24% of equity at FYE11 (2010: 28%). Fitch notes that any increase in such investments may elevate volatility in CFSL’s profitability and capitalisation and negatively impact its liquidity profile.

CFSL continues to have access to local wholesale funding, although mostly short-term in nature (92% of borrowings). Fitch notes that unutilised credit lines did not cover gaps arising from maturity mismatches of interest bearing assets and liabilities, but expects liquidity support from BOC would be forthcoming should it be required.

CFSL’s rating could be affected by a change in circumstances that would warrant a review of Fitch’s expectation of support from parent BOC. A sustained improvement in CFSL’s stand-alone financial profile may lead to a ratings upgrade, while a sustained deterioration in CFSL’s stand alone financial profile may lead to a ratings downgrade.

CFSL is a small specialised leasing company. The company operates via two outlets.