Sri Lanka’s Lanka Orix Leasing gets A (lka) rating

May 29, 2006 (LBO) – Sri Lanka’s pioneering leasing firm Lanka Orix Leasing Company has secured an ‘A (lka)’ credit rating from Fitch Ratings Lanka. Part Japanese owned, LOLCs credit outlook is stable, the rating agency said Monday.

“The rating takes into account the less diversified funding sources available to specialised leasing companies such as LOLC, given the regulatory restrictions on accessing public deposits,” the statement said.

LOLCs core business lies in offering motor vehicle finance.

Portfolio growth has been moderate but consistent, averaging around 16.0 percent over the past three years and is expected to be robust going forward.

Profitability as measured by return on assets (ROA) is healthy and compares well with its peers. ROA was 7.8 percent (annualised) as at the first half of 2006 and 6.9 percent as at FYE05.

Fitch expects the company’s profitability to remain healthy due to its high capitalisation levels and increasing exposure to the high margin segments.

LOLC is comfortably capitalised with equity to assets of 26.0 percent as at first half of 2006 and FYE05.

The company’s relatively high earnings retention would enable it to maintain its capital position going forward.

The company’s leverage of 2.7 times equity as at 1H06 compares favourably with the industry, and is well within the regulatory limit of 10 times equity, notes Fitch.

LOLC’s asset quality has been improving in line with improvements in credit risk management.

Its gross nonperforming loan (NPL) ratio (with NPLs defined as loans in arrears for over three months) was 7.6 percent as at 1H06 and 10.5 percent as at FYE05.

Loan loss reserves covered 95.0 percent of NPLs as at 1H06 and 83.0 percent of NPLs as at FYE05, consequently, the company’s solvency is good with a net NPLs to equity ratio of 1.3 percent as at 1H06 (5.6 percent as at FYE05).

Similar to other leasing companies, LOLC’s funding is predominantly through bank borrowings.

Recently, LOLC sourced funds from multilateral agencies such as the OPEC Fund and FMO, and has some hedging mechanisms in place.

Further, the company intends to develop a retail deposit base through its registered finance company subsidiary, Lanka ORIX Finance Company Ltd.

Fitch expects such initiatives to allow for greater diversity in LOLC’s funding mix and reduce its dependence on the banking sector.

LOLC, which commenced operations in 1980, was the first specialised leasing company to be established in Sri Lanka.

The company was established by ORIX Corporation of Japan, the International Finance Corporation and Bank of Ceylon.

Presently, Raja Nanayakkara and his family own 53.0 percent of the company’s equity, while ORIX owns 30.0 percent of LOLC’s equity.

With an asset base of 8.0 billion rupees, LOLC is one of Sri Lanka’s largest specialised leasing companies, and has subsidiaries in the securities, insurance broking and factoring businesses. LOLC is listed on the Colombo Stock Exchange.