ICRA assigns [SL]A- 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-' with a 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 Group 2 in its position as the flagship subsidiary of Lanka ORIX Leasing Company PLC (HoldCo), which is rated [SL]A-/stable by ICRA Lanka.

ICRA Lanka has taken a consolidated rating view of the HoldCo and its key asset financing subsidiaries.

The rating also factors LOFC's franchise, 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, and stable internal accruals are expected to support capitalisation 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 percent of portfolio as on March 2012), Working Capital (21 percent), Equipment Finance (8 percent), Tractors and others (8 percent). The company registered a compounded annual growth rate (CAGR) of 56 percent over the past five years, but has been substantially supported by the transfer of incremental business from the HoldCo to LOFC as part of the group reorganisation process. The portfolio growth for the LOLC Group remains moderate at a four-year CAGR of 16 percent.

A spokesman for the company said, "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 percent in FY11 to 1.02 percent 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 percent as on March 31, 2012 compared to 17.0 percent 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 capitalisation 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 4.0 percent in fiscal 2012 from 1.1 percent in fiscal 2009 supported by a corresponding improvement in interest spreads.

The operating cost levels also remain competitive in relation to industry levels. Incrementally, LOFC could face pressure on cost of domestically mobilised funds given the hardening interest rate scenario, but the long-term overseas funding lines being pursued by the management could help control the overall cost levels. ICRA Lanka expects profitability levels to remain stable, provided the company manages to keep credit costs under tight control", he said..