ICRA Lanka assigns [SL]A- with stable outlook issuer rating to Lanka
Orix Finance
ICRA Lanka Limited, a wholly owned subsidiary of ICRA Ltd., an
associate of Moody's Investors Service, has assigned an Issuer rating of
'[SL] A-' (pronounced SL A minus)1 with stable outlook to Lanka Orix
Finance PLC. The rating indicates adequate-credit-quality and the rated
entity carries average credit risk. The rating in Sri Lanka is assigned
on an eight-point scale developed specifically for the country, and
ranges from '[SL] AAA' to '[SL] D'. This rating scale ranks the relative
default risk associated with issuers in Sri Lanka.
The rating factors LOFC's close operational and financial linkages
with the LOLC Group2 in its position as the flagship subsidiary of Lanka
ORIX Leasing Company PLC (HoldCo), which is rated [SL]A-/stable by ICRA
Lanka. Given this, ICRA Lanka has taken a consolidated rating view of
the HoldCo and its key asset financing subsidiaries. The rating also
factors LOFC's robust franchise, healthy competitive position given its
superior market share and a professional and experienced management
team. ICRA has taken note of the significant gaps in LOFC's
asset-liability maturity profile, particularly in the short term
buckets, arising from the short term nature of funding, both retail
deposits and institutional funds. While LOFC's refinancing ability
remains good through retail and institutional franchise, ICRA Lanka
expects the company to raise longer-tenure funds to progressively
address this gap.
LOFC's financial leverage has increased as a result of rapid
portfolio growth despite capital infusion from the Parent. However,
lower incremental portfolio growth, stable internal accruals are
expected to support capitalization levels.
The core profitability has been improving in the past few years
backed by higher interest spreads, while operating costs have reduced
because of economies of scale. Incrementally, interest spreads could
shrink marginally in light of the prevailing interest rate environment;
nonetheless ICRA Lanka expects profitability to remain steady provided
the level of credit costs are kept under control.
LOFC focuses on lending against commercial vehicles (63 % of
portfolio as on March 2012), working capital (21 %), equipment finance
(8 %), tractors and others (8 %). The company registered a compounded
annual growth rate (CAGR) of 56 % over the past 5 years, but has been
substantially supported by the transfer of incremental business from the
HoldCo to LOFC as part of the group reorganization process.
The portfolio growth for the LOLC Group remains moderate at a 4-year
CAGR of 16 %. Given the volatility in systemic interest rates, LOFC has
been focusing increasingly on loans, rather than fixed-rate hire
purchases and leases, which gives the company flexibility to adjust
interest rates according to its cost of funds. Asset quality, as
measured through Gross NPAs, improved from 2.24 % in FY11 to 1.02 % in
FY12 through focused recoveries and structured collections process.
However, it would be important to continue to maintain strict control
over asset quality through economic downturns and hardening interest
rate cycles.
LOFC's Capital Adequacy Ratio stood at 14.4 % as on March 31, 2012
compared to 17.0 % as on March 31, 2011, broadly in line with the sector
average. While there are no equity infusion plans in the near term,
portfolio growth is expected to slow down progressively and the capital
requirements would be met through internal accruals. ICRA Lanka,
nonetheless, expects LOFC's capitalization to moderate in the near term
with expected portfolio growth.
LOFC's Return on Average Assets (excluding one-time gains) have
registered steady improvement to 4. % in fiscal 2012 from 1.1 % in
fiscal 2009 supported by a corresponding improvement in interest
spreads. |