Fitch Ratings said yesterday it has affirmed Sri Lanka’s People’s Leasing Company Limited’s (PLC) National Long-term rating at ‘A(lka)’. The Outlook is Stable. At the same time, the agency has affirmed the ‘A(lka)’ rating on the company’s outstanding LKR630m senior unsecured redeemable debentures.
PLC’s ratings reflect the potential for support from its parent - the state-owned People’s Bank (PB, ‘AA-(lka)’/Positive - 100% ownership of PLC), given PLC’s strategic importance to PB. PLC carries out the entirety of its parent’s incremental leasing business, which is the third-largest lending segment within PB, (June 2010: 9% of group advances). At end-December 2009, PLC contributed 26% to PB’s group profit. PLC’s operations are influenced by PB at a strategic level, through full board representation. However, the agency notes that even on a stand-alone basis, PLC’s credit profile remains strong.
The ratings could be upgraded if there is an improvement in PB’s ability or willingness to extend support, which is linked to an improvement in its stand-alone financial strength or PLC’s strategic importance to PB in terms of profit contribution or business volumes, or greater integration between the two entities. A weakening of the above factors could lead to a downgrade of PLC’s rating.
PLC’s loan growth has been higher than the sector’s over 2007-2010, driven by better access to institutional funds despite a weaker economic climate. Fitch attributes this to PLC’s association with PB and its strong stand-alone credit profile. Hire purchase and lease contracts accounted for 55% and 37% of PLC’s advances, respectively, at end-September 2010 (6mFY11), while sundry loans made up 8%.
In 2009, PLC acquired a registered finance company (People’s Leasing Finance Plc (PLF), ‘BBB(lka)’/Stable), which is licensed to obtain retail deposits from the public, helping to diversify group funding sources further. Still, at 6mFY11, retail deposits from the public funded only 6% of PLC group’s assets.
PLC’s asset quality continues to improve, in line with improving economic conditions and its concerted recovery efforts, although NPL ratios (at the 180 days arrears level) remain slightly weaker than the ratios reported between FY05 and FY08. While Fitch notes that PLC’s risk management processes and controls are strong in relation to the scale of its present operations, asset quality may weaken over the medium-term if lending standards are compromised in favour of higher growth, as the loan book seasons.
Fitch notes that PLC’s profitability is strong, driven by healthy net interest margin (NIM) and a lean cost structure. NIMs and costs are in turn supported by relatively low funding costs, well-managed recoveries, and the use of close to 100 window offices within PB’s branch network to acquire considerable business volumes. Asset growth surpassed internal capital generation in 6mFY11, weakening equity/assets to 14% from 16% at March 2010; this is marginally below its rating peers’. However, PLC’s NPLs are well provisioned, thanks to a general provision equal to 5% of loans at March 2010. Nevertheless, further dilution in equity/assets could increase PLC’s exposure to interest rate risk and may exert pressure on return on asset over the medium-term. PLC is the largest specialised leasing company in Sri Lanka in terms of advances, with an asset base of approximately LKR31bn at end-March 2010.