Fitch rates CFSL at 'BBB-(lka)' rating

Fitch Ratings Lanka has today affirmed Ceylease Financial Services Ltd's (CFSL) 'BBB-(lka)' (BBB minus (lka)) National rating. The Outlook is Stable.

CFSL's rating factors in the implied support assumed to be available from its key shareholder, Bank of Ceylon (BOC, 'AA(lka)'/Stable), which owns 50 per cent of CFSL.

As at FYE07, CFSL accounted for 12.7 per cent of the BOC group's entire leasing portfolio. CFSL maintains a close relationship with BOC, benefiting from common board representations, and committed funding lines which amount to 52 per cent of its total borrowings.

CFSL's rating is constrained by its low profitability, small asset base, modest asset quality and high credit concentrations.

Over the last five years, CFSL has gradually moved away from its historical focus on equipment leasing to motor vehicles in order to achieve growth targets.

As at December 2007 the company's exposure to motor vehicles had increased to 82 per cent of its total portfolio from just over 54 per cent in FY03.

CFSL opened a new branch in Kandy in September 2007 in an attempt to diversify its geographical outreach and product base. The Kandy branch is involved in the purchase and sale of real estate in addition to conducting leasing and hire purchase operations.

Profitability as measured by Return on Assets (ROA) decreased considerably to 0.8 per cent as at FYE07 compared to 1.9 per cent at FYE06.

This was mainly due to the increase in its average cost of funds to 17.5 per cent from 14.0 per cent during the period, which was in turn driven by the upward shift in market interest rates during the year.

Increased provisioning and operating costs also contributed to the decline in profits. CFSL was established as a specialised leasing company in 1996 and is currently owned by Bank of Ceylon, Phoenix Ventures (40 per cent) and an Employee Share Option Scheme (10 per cent).