Fitch affirms Ceylease Financial Services at 'BB+ (Lka)'

Fitch Ratings Lanka has affirmed Ceylease Financial Services Ltd's (CFSL) National long-term rating at 'BB+(lka)'. The rating has been removed from Rating Watch Evolving (RWE) and assigned a stable outlook.

The rating has been uplifted based on Fitch's expectation of support from CFSL's parent, the state owned Bank of Ceylon (BOC, 'AA+(lka)'/stable). BOC has a 55 percent shareholding in CFSL and is represented on the latters board. BOC continues to be a key creditor to CFSL accounting for 28 percent of its total borrowings at end 2011. The removal of the RWE, which was placed on July 26,2011), follows Merchant Bank of Sri Lanka (MBSL 72 percent owned by BOC) March 15, 2012 announcement that it would not proceed with its proposed merger with CFSL and other entries of e BOC group.

Fitch notes CFSL's weak stand alone financial profile. The company provides vehicle finance. In the form of leases (37.1%), hire purchase (49.6%) and loans 13.3 % at end 2011. During the year the company wrote-off Rs. 104m of non-performing loans that were fully provided. Consequently its NPL ratio declined to 15.4 percent over three months in arrears and 6.9 percent over six months in arrears at end 2011 from 25.1 percent and 13 percent at end 2010 profitability as measured by pre-tax return on assets increased to 3.9 percent in 2011 largely supported by non-recurring income in the form of interest income on commercials papers and recoveries of NPLs. However pre tax ROA excluding the non-recurring items remained weak at 1.5 percent at end 2011 compared with peers. Investments in equity trading stock accounted for 24 percent of equity at Fye 11. Fitch notes that any increase in such investments may elevate volatility in CFSL's profitability and capitalisation and negatively impact its liquidity profile.

CFSL continues to have access to local wholesale funding, although mostly short term in native Fitch notes that unutilised credit lines did not cover gaps arising from maturity mismatches of interest bearing assets and liabilities, but expects liability support from BOC would be forthcoming should it be required.