Fitch affirms CLC at ‘A-’; Outlook Stable

Fitch Ratings Lanka has affirmed Commercial Leasing Company Ltd.’s (CLC) National Long-Term rating at ‘A-(lka)’ with Stable Outlook The agency has also affirmed CLC’s senior unsecured debentures at ‘A-(lka)’.

In Fitch’s view, CLC’s ratings are driven by its standalone financial strength rather than support from its parent, Lanka Orix Leasing Company PLC (LOLC; A-(lka)/Negative). They reflect the company’s sound asset quality and profitability and robust capitalisation. The Stable Outlook reflects the agency’s view that CLC is likely to maintain credit metrics that are consistent with the current ratings.

Sustained improvements in CLC’s credit profile could place upward pressure on its ratings. Conversely, a weakening of capitalisation due to, among other things, aggressive asset growth without a commensurate build-up in earnings, or any large equity investments causing sustained pressure on its core profitability, could have downward pressure on CLC’s ratings, as could a significant and sustained weakening of asset quality.

CLC is fully owned by LOLC, and while there is some integration of core operations such as treasury and certain back-office functions, the two companies operate as separate entities, benefiting from strong brand franchises in their respective customer segments.

CLC is an important contributor to LOLC’s profits (FY10: 19% of post tax consolidated profit excluding contributions to minority interest) and is also important in broadening the customer base of the LOLC group.

CLC’s book of advances grew 56% to Rs. 15.7 b in the nine months ended December 2010 (9MFY11). Lending comprises mainly hire purchase and lease facilities which accounted for 54% and 23% of total advances respectively at end-9MFY11.

The company also continued to grow its debt factoring portfolio, which now accounts for 13% of total advances. Its gross non performing advances (NPA) ratio compares well with the sector’s even after excluding CLC’s rapid loan growth. Gross NPAs accounted for 2.1% of total advances at 9MFY11 (FYE10: 3.4%) versus 7.3% at FYE10 for specialised leasing companies rated by Fitch.

CLC’s profitability compares well with the sector. Return on assets increased to 5.8% in 9MFY11 (FY10: 3.2%) although Fitch notes that this will reduce by FY11 once expense allocations to its parent company are completed in Q4FY11. Operating cost structures increased from FY09 due to high cost allocations from LOLC.

Capitalisation improved in 9MFY11 following a Rs. 1 b equity infusion from LOLC to support loan growth. Equity to assets increased to 19% in 9MFY11 from 16.2% in FY10, and gearing fell to 3.6x capital funds (FYE10: 4.4x), well below the 7x regulatory ceiling. However, Fitch notes that if CLC continues its rapid growth without commensurate earnings accrual and retention, capitalisation could come under pressure.

CLC is a specialised leasing company, involved in hire purchase and debt factoring. It has 29 branches and seven service centres. It owns a 50% stake in Diriya Investments Pvt. Limited – an investment holding company and a 40% stake in Commercial Insurance Brokers, an insurance broking company.