Fitch affirms Commercial Leasing at 'A-(lka)'

Fitch Ratings Lanka has affirmed the 'A-(lka)' (A minus (lka)) National Rating of Commercial Leasing Company (CLC).

The rating Outlook has been revised to negative from stable.

CLC's rating factors in its relatively good financial profile, and the implied support available from its institutional shareholders - Commercial Bank of Ceylon (CB, 'AA+(lka)'), Singer (Sri Lanka) (SSL, Singer's senior unsecured debt is rated at 'A+(lka)'), and Chemanex - who collectively own 97% of CLC's equity.

The rating also factors in CLC's relative size compared to larger peers and banks, as well as the funding limitations inherent in the business model of specialised leasing companies (SLC's).

The revision of the outlook reflects Fitch's concern over the deterioration in CLC's asset quality and its implications on solvency. CLC's asset quality dipped towards the later part of FY06 and in Q107 in line with industry peers, albeit to a greater degree.

The ratio of gross non-performing loans (NPLs) in arrears for over three months deteriorated to 12.6% at end-Q107 and 11.5% at FYE06, from 5.4% at FYE05. As a result, solvency (measured by Fitch as net NPL's above three months/equity) weakened to 62.1% at end-Q107 and 53.4% at FYE06 compared to 19.8% at FYE05, despite the improvement in the company's capital position.

CLC managed to improve on its recoveries somewhat during Q207, resulting in a gross NPL ratio of 11.7% at the three-month level at end-June 2007, although its solvency at 49.9% remained weaker than that of industry peers in its current rating category.

Fitch observes that solvency could continue to be under pressure in the absence of fresh equity infusion plans in the near term.

While a persistently high level of solvency could result in a downgrade of CLC's rating, improvements in the same to levels commensurate with that of industry peers could influence the revision of the Outlook.

Although the net increase in portfolio volumes remained similar year on year, portfolio growth dipped to 31% at FYE06 off a higher base, compared to a five year compounded annual growth rate of 44% (between FYE01-FYE05).

Growth was declined further during Q107 (to an annualised rate of 16%) and is in line with average growth rates for the leasing sector. Over 99% of CLC's loan book consists of vehicle leases and hire-purchase loans - a mix which has largely remained unaltered and over 46% of CLC's assets are funded by way of direct bank borrowings.

Equity funding increased to 13.4% of assets at FYE06 (from 10.2% at FYE05), benefiting from a rights issue of LKR121m, increased earnings retention (38% at FYE06 against 21% at FYE05), and a revaluation of CLC's head office premises (LKR78.4m). Securitisations increased marginally to 20.6% of total assets at FYE06 compared to 19.1% at FYE05.