Fitch upgrades ORIX Finance

Fitch Ratings Lanka has yesterday upgraded Lanka ORIX Finance Company Ltd’s (LOFIN) National Long-term rating to ‘A-(lka)’ (A minus (lka)) from ‘BBB+(lka)’. The Outlook is Stable.

The upgrade of LOFIN’s rating reflects the increased level of integration with its parent, Lanka ORIX Leasing Company PLC. (LOLC, ‘A(lka)’/Stable) and in the agency’s view, its increased strategic importance to the latter.

Over the last 12 months the operations of both entities have become closely integrated, functioning almost as if they are a single entity. Both now operate within the same premises and share personnel, product standards, operational procedures and processes, and pricing. Furthermore, LOFIN’s contribution to net group funding rose to a strategically important 9.4% of total net funding and its contribution to pre-tax profits rose to 10.8% for Q109.

LOFIN continued its steady growth trend, driven almost entirely by LOLC’s brand name and customer franchise, with total advances growing 47.3% yoy in FY08. A central treasury based on funding, liquidity and statutory guidelines determines placement of assets within either portfolio.

LOFIN’s lending portfolio composition is closely aligned to its parent’s; although unlike LOLC, LOFIN does not engage operating lease business and its microfinance activity has been confined to pawning.

As seen across the LOLC group, there has been an increase in the proportion of Working Capital loans and Hire Purchase facilities (HPs) within LOFIN’s portfolio, which has hitherto been dominated by lease products. Working capital loans and HPs accounted for 48.6% (FYE07: 34.8%) and 18.1% (FYE07: 14.4%) of total advances respectively at FYE08. The remainder of the portfolio comprises mainly finance leases, though the company also has a small margin-trading portfolio.

Asset quality weakened in Q109 with three-month NPLs increasing to 10.3% of gross loans, on account of a single large delinquency on LOFIN’s working capital loan book; without which the company’s gross NPL ratio would be closer to its parent’s of 8.2% at Q109.