Fitch revises Commercial Leasing’s Outlook to Negative

Fitch Ratings Lanka has revised Commercial Leasing and Finance Limited’s (CLC) Outlook to Negative from Stable. The agency has affirmed CLC’s National Long-Term rating and the rating on its senior unsecured debentures at ‘A-(lka)’.

The Negative Outlook reflects the heightened risk profile of CLC’s parent Lanka ORIX Leasing Company PLC (LOLC; ‘BBB+(lka)’/ Negative), and the potential for it to weaken its subsidiary’s financial profile.

CLC’s strategic and operational ties with LOLC remain strong and as one of LOLC’s stronger subsidiaries could be relied upon to support its parent if required. LOLC was downgraded on 28 February 2012, reflecting Fitch’s view that LOLC has demonstrated a higher appetite for market risk.

CLC’s ratings take into account its strong credit metrics, particularly asset quality and absolute and relative capitalisation and profitability. The company has maintained a solid growth strategy, supported by improvements in the domestic economy and structural changes within the organisation which have enabled it to maintain its financial profile in line with higher-rated peers.

A further weakening of LOLC’s credit profile could result in a downgrade of CLC’s ratings. Material improvement in the holding company’s risks could result in CLC’s Rating Outlook being revised to Stable.

CLC was granted a Registered Finance Company license in December 2011 by the Central Bank of Sri Lanka, enabling it to mobilise deposits. This will enable CLC to diversify its funding base which has hitherto been reliant on institutional borrowings. CLC’s deposit base averaged Rs. 200 m in February 2012, and it aims to leverage on its extended branch network to increase deposits.

Capitalisation ratios remained strong in the financial year ended March 11 (FY11) and 9MFY12 despite rapid loan growth. This was helped by high profitability and capital retention. Equity to assets increased to 24.1% at end-9MFY12 (FYE11: 17.2%), benefiting from a large realised gain and a Rs. 1 b equity injection from CLC’s parent in FY11.

Profit after tax of Rs. 3.2 b in 9MFY12 was boosted by a one-off gain of Rs. 2.03 b from the sale of Diriya Investments Ltd. (DIL) to its parent company in Q2FY12. Pre-tax return on assets (excluding gain) increased to 7.7% in 9MFY12 (FY11: 5.2%), supported by an improved cost structure and control on credit cost.

Net interest margins, although trending down (in line with market interest rates) remained in line with peers, and benefited from the sale of DIL – which was a non-earning debt-funded asset accounting for 28% of equity at FYE11. Fitch notes, however, that there could be higher cost allocations to LOLC in future, which could constrain CLC’s profitability.

Gross non-performing advances (NPA) fell 39% in FY11, supported by strong recovery initiatives. This, together with rapid loan growth, resulted in CLC’s gross NPA ratio on non-factoring advances falling to 1.3% at FYE11 (FYE10: 4%). Although this figure increased with loan seasoning to 2.7% in January 2012, it remains lower than peers’.

CLC’s factoring book (15% of advances) also had a low delinquency proportion of around 2%. Fitch notes that loan loss reserve coverage is high, limiting the potential impact of loan losses on equity.

CLC is 90%-owned by LOLC and expects to list its shares on the Colombo Stock Exchange by 2013 to meet regulatory requirements.