Fitch upgrades People’s Leasing Finance to ‘BBB’

FITCH Ratings has upgraded Sri Lanka’s People’s Leasing Finance Plc’s (PLF) National Long-term rating to ‘BBB(lka)’ from ‘BBB-(lka)’. The Outlook is Stable.

The upgrade reflects Fitch’s view that support from its parent, People’s Leasing Company Limited (PLC, ‘A(lka)’/Stable, a 93% ownership), is more likely to be available than in the past. This is in turn premised on the agency’s view that PLC’s stand-alone financial strength has improved over the past 12 months.

Unlike PLC, PLF is licensed to mobilise public deposits, and therefore helps to diversify PLC group’s funding base and reduce cost of funds. PLC also channels Islamic lending products via PLF, broadening the group’s lending portfolio.

The ratings could be upgraded if there is a greater operational integration between PLC and PLF, or an increase in PLF’s strategic importance to the PLC group – measured by the proportion of deposit-funded group-assets – while maintaining healthy asset quality and profitability. Conversely, a weakening of PLC’s stand-alone financial position, or a perceived waning of PLF’s strategic importance to PLC, could result in a downgrade of PLF’s rating.

PLF’s gross advances grew by 68% in the six months ended September 2010 (6mFY11), driven by renewed marketing efforts amid improving economic activity. At end-6mFY11, PLF’s advances consisted of lease and hire purchase contracts (76%) and sundry loans (24%), which are predominantly used for financing motor vehicles.

Fitch notes that on 49% of its sundry loans, the company would need to resort to legal recourse for the ultimate recovery of the asset, and is therefore more risky. To reduce this risk, PLF maintains that such products are generally disbursed selectively to customers with good repayment records.

PLF’s NPLs, at the regulatory six-month arrears level, have broadly remained stable in absolute terms between December 2008 and September 2010. Gross six-month NPLs reduced to 5.7% of gross advances, from 11.3%, on the back of strong loan growth during the above period.

Fitch expects PLC’s strong operational influence to continue to strengthen PLF’s risk management processes and controls. However, any compromise in lending standards amid the current high loan growth could weaken asset quality over the medium-term, as the portfolio seasons.

PLF’s deposit growth outpaced loans in 6mFY11 (+75%). The company’s average interest cost has reduced in line with market interest rates, while the average premium offered on deposit rates has narrowed compared to larger competitors’, and is indicative of its improving deposit franchise. At end-6mFY11, PLF’s deposits funded 6% of PLC group’s assets (end-March 2010: 5%).

PLF’s profitability as measured by return on assets (ROA) improved to an annualised 2.20% at end-6mFY11 (FY10: -4.04%), helped by widening net interest margin and low credit costs. The company received a capital injection of Rs. 567 m in October 2010, which improved its regulatory capital adequacy ratio to over 15%, from a temporarily weakened 7.10% at end-6mFY11.

PLF is evolving into a mid-sized registered finance company, with a network of 23 outlets. At end-6mFY11, the company’s asset base stood at Rs. 4.1 b.