ICRA Lanka assigns A-rating with stable outlook to LOLC’s Rs. 1.25 b unsecured debenture

ICRA Lanka Ltd., a wholly owned subsidiary of ICRA Ltd., an associate of Moody’s Investors Service, has assigned [SL]A- (pronounced SL A minus) with a stable outlook to the Rs. 1.25 billion Long Term Unsecured Redeemable Debenture Programs of  Lanka ORIX Leasing Company PLC (LOLC or the HoldCo).

The ratings continue to factor LOLC Group’s long track record of profitable operations, its leading position in the Sri Lankan financial services business market, professional and experienced management team, adequate risk management systems with strong retail franchise. The rating also takes into account the committed support and oversight from its largest investor–ORIX Corporation of Japan (rated Baa2 with stable outlook by Moody’s) which has a 30% stake in the entity.

ICRA Lanka has taken a consolidated rating view of the HoldCo and the key asset financing subsidiaries given the significant operational and financial linkages with the subsidiaries (especially pertaining to financial services).

In the current fiscal, the group’s asset quality has deteriorated with gross NPAs increasing to 2.73% in September 2012 from 2.03% in March 2012, partly owing to the moderation in the operating environment. The net NPA ratio for the group remains comfortable at 0.58% as on September 2012 though it has deteriorated from the March levels of 0.20%. Incrementally, maintaining control over asset quality and credit costs would remain a key rating sensitivity.

HoldCo’s gearing remains unchanged at 2x in September 2012, despite the run-down of its lending portfolio, though intra-group exposures recorded marginal decreases from March 2012 levels. Given that the HoldCo’s standalone operating income levels have dropped sharply, it would be important to reduce standalone leverage in the short term.

The ability of the HoldCo and the LOLC group to improve on their operating margins given the volatile interest rate scenario and the group level asset quality indicators will remain the key rating sensitivities. The rating also factors in that the HoldCo currently does not intend to provide any material guarantees to any of its subsidiaries or undertake any major debt funded acquisition in the near term which could impact its credit profile.

The group lending portfolio has recorded marginal negative growth of 1% for the six months ended September 2012. The HoldCo’s lending portfolio has reduced over the last two quarters in line with its strategy to offload lending operations to its financial services subsidiaries, however the group level asset quality of the lending portfolio has been deteriorating over the last two quarters in the current financial year with gross NPA ratio increasing to 2.73% as on September 30, 2012 from 2.03% reported as on March 31, 2012.

The net NPA ratio for the group remains comfortable at 0.58% as on September 2012 though it has deteriorated from the March levels of 0.20%. ICRA Lanka would be closely monitoring the group level asset quality as further significant declines would lead to rating action.

No significant reduction in the Holdco’s investment securities portfolio was seen during the last two quarters with the portfolio remaining at Rs. 3.3 billion as at September 2012 compared to Rs. 3.5 billion reported as at March 2012 mainly because of adverse market conditions. ICRA notes that scaling down the trading portfolio would be important for the HoldCo to reduce its short term debt levels.

The group has raised one round of long term foreign currency debt in LOMC (a subsidiary) however; the ALM position is largely unchanged from March 2012. The pipeline of overseas long term debt is robust and could support the ALM position going forward.  

Profitability from core operations (operating profit net of provisions) improved to 2.87% in YTD September 2012 from 2.46% in fiscal 2012 at the group level. However, net profitability was lower at 2% in YTD September 2012 compared to 7% in fiscal 2012 as the same was supported by Rs. 4 billion profit on sale of investments and Rs. 3 billion in negative goodwill in fiscal 2012.

Group level profitability as at September 2012 has weakened in terms of Return on Net Worth (RONW) and Return on Average Assets (ROAA) compared to March 12. RONW recorded at 23.39% as at March 12 fell to 7.02% for YTD September 2012 (5.74% as at March 2012 excluding one-time gains); whilst ROAA recorded at 6.99% as at March 2012 fell to 1.96% for YTD September 2012 (1.67% as at March 2012 excluding one-time gains).

Financial services continues to be the key sector for the groups recording 99% of the group profits, and  the HoldCo continues to be dependent on the financial services subsidiaries for its income; generated from lending to subsidiaries and shared services fee income charged from subsidiaries. The HoldCo ensures a profitability margin of while pricing shared services of the group.