June 6, 2006 (LBO) – Sri Lanka’s Ceylease Financial Services – a unit of Bank of Ceylon – needs to pump up its capital to support their low income base and future provisional charges, Fitch Ratings Lanka warned Tuesday. Fitch, which assigned a ‘BBB-(lka)’ rating to Ceylease, says the credit rating reflects the firm’s parental backing (50 percent owned by BOC) and small size.
“Ceylease’s ratings are also constrained by its relatively small size, its higher credit risk associated with equipment leasing, its high credit concentrations and the overall low margins in its leasing portfolio,” the agency said.
Historically, Ceylease has focused on equipment leasing.
Since 2003, the firm shifted focus on to vehicle financing (leasing and hire purchase), changing the company’s portfolio mix significantly, with equipment leasing and vehicle financing accounting for 24.0 percent and 76.0 percent, respectively, of the portfolio as at December ’05 (52.0 percent and 48.0 percent, respectively, as at December ’03).
Ceylease portfolio yields were less than the sector average due to lower margins offered to its corporate clientele. Consequently, pre-provisioning return on assets (ROA) was low, at 3.6 percent in 2005 (3.4 percent in 2004), notes Fitch.
The company’s asset quality improved with non-performing loans (“NPL”)/gross loans declining to 4.8 percent as at December â€˜05 from 8.3 percent in 2003.
At the same time, Ceylease has increased its provision cover.
Loan loss reserves covered 61.0 percent of NPL as at December ’05 (58.0 percent as at Dec ’03) while its net NPL to equity ratio improved to 20.0 percent as at Dec 05 (30.0 percent as at Dec 03).
As at December 05, the equity/assets ratio declined to 9.6 percent from 10.7 percent as at December 04.
Given the relatively high credit concentrations, the agency notes that Ceylease’s capital ratios look less healthy.
In absolute terms, Ceylease’s equity base was among the lowest in the sector.
“â€œThis underscores the need for Ceylease to increase its capital to support growth given the relatively low net income levels and the likely potential provisioning charges.” Ceylease was established as a specialised leasing company in 1996 in Sri Lanka, and is currently owned by Bank of Ceylon – rated ‘AA (lka)’, The Phoenix Group (30.0 percent), Union Assurance (10.0 percent), and an employee share option scheme (10.0 percent).