Sri Lanka’s LOLC ‘[SL] A-‘ rating confirmed, outlook lowered

Sept 23, 2013 (LBO) – ICRA Lanka has confirmed an ‘[SL] A-‘ rating of Lanka Orix Leasing Company (LOLC) and two subsidiaries, and has lowered its outlook to negative.

The outlook on the ‘[SL] A-‘ rating of Lanka Orix Finance Plc (LOFC), and Commercial Leasing and Finance (CLC) has also been lowered to negative.

ICRA said most non-bank lenders in the country has seen weakening asset quality due to bad weather in agriculture and a weaker economy. At LOLC there had been delinquencies in a few large clients in agriculture and trade.

“Operating environment in the country continues to remain relatively stressed in the current fiscal and economic conditions and further deterioration in asset quality and related stress on profitability cannot be ruled out, ” the rating agency said.

But LOLC had a long track record in retail financing, an experienced management team, adequate risk management with a strong retail franchise.

The full statement is reproduced below:

ICRA Lanka affirmsthe ratings at [SL] A-, revises outlook for Lanka ORIX Leasing Company and its subsidiaries

ICRA Lanka Limited, a wholly owned subsidiary of ICRA Ltd., an associate of Moody’s Investors Service, has affirmed the ratings of Lanka ORIX Leasing Company PLC (LOLC or the HoldCo) and its key financial services subsidiaries Lanka Orix Finance PLC (LOFC) and Commercial Leasing and Finance PLC (CLC) while revising the outlook to negative. The rating action taken on these three entities are tabulated below:

LOLC [SL]A- reaffirmed; outlook negative
Long Term Unsecured Redeemable Debenture Programme Rs. 750 Mn [SL]A- reaffirmed; outlook negative

Long Term Unsecured Redeemable Debenture Programme Rs. 500 Mn

LOFC Issuer Rating N/A [SL]A- reaffirmed; outlook negative

CLC Issuer Rating N/A [SL]A- reaffirmed; outlook negative

Given the significant operational and financial linkages with the subsidiaries (especially pertaining to financial services), ICRA Lanka continues to take a consolidated rating view of the HoldCo and the key asset financing subsidiaries.

Most NBFIs in the country have reported deterioration in asset quality in the past year because of stressed operating environment and adverse weather conditions which impacted the agricultural sector.ICRA Lanka’s decision to revise the rating outlook follows the significant deterioration seen in the Group level Asset Quality and the consequent decline in the profitability levels of the Group including the key financial services subsidiaries. LOLC Group’s deterioration has been sharper compared to peers due to delinquencies witnessed in a few large clients and high slippages recorded in LOLC group’sagricultural and trade sector exposuresdue to weak macroeconomic conditions. Operating environment in the country continues to remain relatively stressed in the current fiscal and economic conditions and further deterioration in asset quality and related stress on profitability cannot be ruled out. Arresting asset quality deterioration and improvement in the earnings profile at a group level would be key rating sensitivities; ICRA Lanka would be closely monitoring the same.

The ratings continue to factor LOLC Group’s long track record in the retail finance sector, its leadership position in the Sri Lankan retail finance market, professional and experienced management team, adequate risk management systems with strong retail franchise. The rating also derives support from the committed support and oversight from its largest investor–ORIX Corporation of Japan (rated Baa2 with stable outlook by Moody’s) which has a 30% stake in the entity. ICRA Lanka has also taken note of the management’s progress to de-leverage the Holdco from gearing of 2x as on March 2012 to 1.6x by March 2013 by reducing intra-group exposures and the run-down of its lending book. The ability of the HoldCo and the LOLC group to improve on their operating margins while reducing the standalone and group leverage will have a bearing on the rating going forward.

ICRA Notes that the LOLC’s leisure sector exposures continue to report losses due to hotels being closed down for renovation. Rs904 Mn of losses (24% of total Group PBT) were recorded for the FYE Mar-13 in the leisure segment while the Trading Segment reported profits of Rs 148Mn (4% of total Group PBT). LOLC’s insurance business turned profitable during the FYE Mar-13 however the power segment reported losses.
LOLC’s has gradually scaled down its trading investment portfolio over the past FY. The trading and investments securities portfolio stands at around Rs. 1.2 bn (as at Mar-13) down from Rs 4.0Bn reported as at Mar-12. Seylan Bank was reclassified from the trading portfolio into an associate company. Further in Jun-13 LOLC through its subsidiary LOLC Micro Investments acquired a 33.4% stake in Nanda Investments and Finance PLC with the remaining 56.6% stake acquired by BRAC.

Resource profile remains moderate for the LOLC Group despite the strong deposit franchise as the funding mix comprises mainly of short term debt, which exposes LOLC Group to significant interest rate sensitivity. Increase in funding cost in fiscal 2013 has resulted in erosion of interest margins. It would be important to tap the long term overseas funding at a relatively lower cost, for which the Group is currently in negotiations.
Group level earnings weakened considerably with the ROAA dropping to 1.66% in fiscal 2013 from 4.45% in fiscal 2012 mainly because of sharp increases in funding and credit costs; however recovered to 1.74% in QE June 2013.