Strong 2010 for specialised leasing firms

The Specialised Leasing Companies (SLCs) in 2010 continued to grow in terms of business with improvements in credit quality and favourable provisioning for bad and doubtful accommodations, according to Central Bank sources.

The combined assets of 70 companies registered grew by 38% to Rs. 154 billion as against a growth of 1% in 2009 whilst profit after tax increased to Rs. 4 billion during the nine-month period ending December 2010, recording a 167% growth compared to a negative growth in the previous year.

Here are some highlights of the performance of the specialized leasing companies in 2010 as explained in the Central Bank 2010 Annual Report.

Business growth

(a) Outreach: As at the end of 2010, the number of institutions registered under the Finance Leasing Act was 70 of which 15 were licensed banks, 34 were RFCs and 21 were SLCs. The SLC sector’s branch network further expanded to 224 with the opening of 44 branches, compared to 180 in 2009. Of the new branches, 15 were opened in the Northern and Eastern provinces.

(b) Assets: During 2010, the total assets of SLCs grew significantly by 38% to Rs. 154 billion compared to a lower growth of 1% in 2009. The high growth of accommodations, at 32%, compared to the negative growth of 10% reported in 2009, was the key contributory factor. The growth of accommodations was mainly in relation to finance leases and hire purchases which recorded an annual growth of 36% and 50%, respectively. However, the share of accommodations in total assets declined to 68% with a commensurate increase in investments. Three SLCs continued to dominate the sector accounting for 72% of the sector’s total assets.

(c) Liabilities: Borrowing, which is the major funding source of SLCs, increased by 42% from Rs. 74 billion in 2009 to Rs. 105 billion in 2010. While debt instruments retained its share in funding, other borrowings increased. Capital funds increased by 29% with its share in total funding reducing marginally to 17%.

Risk management

The exposure to credit risk declined as shown by the reduction in both non-performing accommodations (NPA) volume and ratio. The NPA ratio declined to 5% by end 2010 from 8% at end 2009 while the NPA amount declined to Rs. 5.4 billion from Rs. 6.0 billion.

A significant improvement of provisioning from 57% of NPA to 78% was a risk mitigation factor. The exposure to investments was high as investment in shares of subsidiaries/related companies amounted to 53% of capital funds of the sector. The SLC sector benefited from the declining market interest rates as indicated by the improvement in the interest margin from 5% in 2009 to 7% in 2010. The sector maintained liquid assets amounting to Rs. 15 billion as at end December 2010, indicating a marginal increase of 15%, compared to the increase of 127% in 2009. These liquid assets stood at 14% of total borrowings as at end 2010.

Profitability and capital

(a) Profit: Profitability improved towards the pre-2008 level. The profit after tax increased to Rs. 4 billion during the nine-month period ending December 2010, recording a 167% growth compared to a negative growth in the previous year. The significant growth of profitability was reflected in the ROA (pre-tax) and ROE of 5% and 20%, respectively, in 2010. The ROA and ROE were 3% and 10%, respectively, in 2009.

(b) Capital: Capital funds of the sector improved by 29% to Rs. 26 billion from Rs. 21 billion as at end December 2009, mainly on account of retained profits. However, the ratio of capital to assets marginally decreased. When compared with the gearing ratio of seven times the capital funds required under prudential regulation, maintaining it at four times showed the ability to manage risks with a greater level of capital.

Supervisory and regulatory developments

To facilitate future growth with prudence, the required minimum core capital was increased from Rs. 75 million to Rs. 100 million to be effective from 1 January 2012 with further increases to Rs. 150 million, Rs. 200 million, Rs. 250 million and Rs. 300 million in 2013, 2014, 2015 and 2016, respectively. Meanwhile, the minimum capital a public company is required to have to qualify for registration was also increased to Rs. 100 million from 1 January 2011 with an annual increase of Rs. 50 million to reach Rs. 300 million by 1 January 2015. Two new directions on reporting requirements and opening/closing/ relocating branches/business places were issued.

Favourable depreciation allowances in relation to equipment, to be permitted from April 2011 when calculating tax will be beneficial to the leasing business and its profitability.