Financial Institutions l Sri Lanka Credit Analysis Lanka Orix Leasing Company PLC Rating Rationale
Ratings Current
Ratings
·
The rating of Lanka ORIX Leasing Company PLC (LOLC) reflects its strong
financial profile and established customer franchise in the leasing industry.
Fitch Ratings Lanka also takes comfort from LOLC’s association with ORIX
Corporation of Japan (ORIX) which has held 30% of its equity since inception.
Nevertheless, the relative lack of diversity in LOLC’s funding is a constraint.
·
LOLC’s lending portfolio grew at a pace of 40.3% during the 12 months ending
31 March 2007 (FY07), compared to an average growth rate of 16.3% for the
specialised leasing company (SLC) sector. Loan growth continued at a high
annualised pace of 33.8% during the three months ending 30 June 2007 (Q108)
in contrast to the slowdown witnessed across the leasing industry.
·
The high loan growth was supported by access to credit lines from multilateral
donor agencies ‐ a significant advantage that the company enjoys whereas other
local SLCs have to rely more on local institutional borrowings. As at FYE07,
16.1% of the group’s assets were funded by such credit lines (17.3% at FYE06).
·
LOLC’s gross non‐performing loans (NPLs, defined by Fitch as loans in arrears for
over three months) increased in nominal terms during FY07 and Q108, as
experienced across the sector. The gross NPL ratio increased to 2.8% and 5.6%
at FYE07 and Q108 respectively, from 1.7% at FYE06. However this ratio remains
lower than its peers’, and is largely due to the company’s year‐end write‐off
policy of NPLs in arrears for over 24 months. The net NPLs/equity ratio
(solvency) increased to 19.9% at Q108 from 9.0% at FYE07, due to NPL
accretion. Fitch observes that in the current weak macroeconomic environment
the company will have to continue its aggressive monitoring of asset quality in
tandem with its high loan growth.
·
LOLC’s net interest margin (NIM) narrowed to 8.5% at FYE07 from 9.9% at FYE06
due to the increase in funding costs, brought on by increasing market interest
rates over the period. The lower NIM, coupled with an increase in provisions for
doubtful debts, resulted in pre‐tax return on assets (pre‐tax ROA) declining to
5.79% at FYE07 from 6.45% at FYE06. However post‐tax ROA remained high at
5.77% due to LOLC’s significantly lower effective tax rate of 0.4% at FYE07
compared to a peer average of 31.0%.
National
Long‐Term
A(lka)
Sovereign Risk
Foreign Long‐Term IDR
Local Long‐Term IDR
BB‐
BB‐ Outlook National Long‐Term
Stable
Sovereign Foreign Long‐Term IDR Negative
Sovereign Local Long‐Term IDR Negative Financial Data Lanka Orix Leasing Company PLC 31 Mar 07 31 Mar 06
Total assets (USDm)
Total assets (LKRm)
Total equity (LKRm)
Net income (LKRm)
ROA (%)
ROE (%)
Equity/assets (%)
190.9
20,888.7
3,694.3
986.6
5.8
30.2
17.7
129.4
13,298
2,850.3
664
6
25.7
21.4 Analysts Hasira De Silva
+9411 254 1900
hasira.desilva@fitchratings.lk
Rukshana Thalgodapitiya
+9411 254 1900
rukshana.thalgodapitiya@fitchratings.lk
Support
·
LOLC is not part of the country’s payments and settlements system and is of
lower systemic importance than mainstream commercial banks. Therefore it is
unlikely that state support would be available. Key Rating Drivers
·
The rating Outlook for LOLC is Stable. An upgrade will be linked to the
diversification and sustainability of its funding streams while sustaining healthy
levels of profitability and solvency. A significant deterioration in profitability or
solvency could result in a downgrade. Profile LOLC is Sri Lanka’s pioneer SLC and was established in 1980. www.fitchratings.com 30 November 2007 Financial Institutions
· Established in 1980, LOLC
is the pioneer specialised
leasing company in Sri
Lanka
· The company has recently
started to offer a
multitude of related
services via five wholly
owned subsidiaries and an
associate company, which
carry LOLC’s brand name.
Profile LOLC is Sri Lanka’s pioneer SLC and was established in 1980 by the International
Finance Corporation (IFC) and Bank of Ceylon (rated ‘AA(lka)’), in technical
collaboration with ORIX Leasing (ORIX) of Japan. While ORIX has maintained an
equity stake of 30% in LOLC since inception, Mr. Raja Nanayakkara and his family
(who are leaders in the import and sale of new and used Japanese motor vehicles,
and have business interests in plantations and land development) acquired a
controlling interest in 2002 and currently hold over 54% of LOLC’s equity. LOLC is
listed on the Colombo Stock Exchange and the remaining 16% is widely owned.
LOLC’s mainstay is the provision of motor vehicle finance through leases, hire
purchase (HP) contracts, and vehicle loans – a market in which it enjoys a strong
customer franchise. LOLC commands a market share of around 8% of total leasing
and hire‐purchase loans (including those of banks, SLCs and registered finance
companies (RFCs)).
The company has recently started diversified into other forms of lending and
related services via five wholly owned subsidiaries and an associate, all bearing
LOLC’s brand name. In addition to vehicle finance, LOLC group’s total product base
currently comprises operating leases (mainly to large corporate clients), working
capital lending, agro‐ and micro‐finance, insurance brokering, and information
technology services. The group also provides debt factoring and invoice discounting
services via its subsidiary, Lanka Orix Factors Limited (LOFAC). During 2001 LOLC
obtained an RFC licence via its subsidiary, Lanka Orix Finance Company Limited
(LOFIN, rated BBB+(lka)), in order to facilitate the mobilisation of savings and time
deposits from the general public.
The total contribution from subsidiaries towards group revenue and assets was 24%
and 21% respectively at FYE07. Notwithstanding this, over 60% of the group’s
revenue at FYE07 was derived from financing motor vehicles — a concentration
which LOLC expects to reduce over the longer term.
Group Revenue Composition
As of FYE07
LOFAC
8%
Others
8%
LOFIN
8%
LOLC
76%
Source: LOLC annual report
Due to its long‐standing affiliation with ORIX, and relatively good financial profile,
LOLC enjoys long‐term credit lines at concessionary rates from various bilateral and
multilateral donor agencies such as the Netherlands Development Agency, and the
Asian Development Bank. In addition to funds, the company derived further support
from Deutsche Investitions‐ Und Entwicklungsgesellschaft (DEG) of Germany, in
areas such as market‐ and liquidity‐risk management and the development of its
management information systems. LOLC’s foray into micro‐ and agro‐finance in
recent times — an inherently riskier form of lending — is further supported by the
United States Agency for International Development (USAID), which has undertaken
to guarantee 50% of the capital loss on selected micro‐lending schemes, should
losses arise. Such funds, together with a growing customer deposit base sourced via
LOFIN a , has helped LOLC to reduce somewhat its dependence on local market
borrowings.
LOLC has a network of 22 branches at present, spanning 12 of the country’s 25
districts — branches are concentrated around the core city‐centres within each
district. The company currently sources around 70% of its business through new
customers, while the remainder is accounted for by its existing clientele.
A total of three (out of 11) board seats are represented by the Nanayakkara family
among LOLC’s board of directors. Two out of three family members, together with
LOLC’s group managing director, serve as executive directors, while two members
of ORIX’s senior management also serve at board‐level and are required to attend
board meetings on a quarterly basis.
a
Lanka Orix Leasing Company PLC
November 2007 See funding mix; page 7
2 Financial Institutions
Peer Performance Comparison
National Long‐Term Rating
Outlook
(LKRm)
Total assets
Loans and advances
Borrowings
Equity
Total income
Net income
(%)
Net interest margin
Pre‐tax ROA
ROA
Cost/income
Equity/assets
Operating costs/average assets
Gross NPLs/gross loans
Net NPLs/equity
Loan loss reserves/NPLs
LOLC (Company)
Q108a
FYE07
A(lka)
Stable
FYE06
CF
FYE07
A+(lka)
Stable
PL
FYE07
A‐(lka)
Stable
CLC
FYE06
A‐(lka)
Negative
Peersb
SLC
Sector
(excludes
LOLC)
22,958
14,698
18,290
3,737
1,938
601
20,889
13,554
16,250
3,694
1,915
987
13,298
9,661
9,824
2,850
1,319
664
27,837
20,511
5,967
5,297
3,080
1,044
17,091
18,053
12,224
2,681
2,313
748
7,746
7,516
5,844
1,038
745
268
52,673
46,080
24,034
9,015
6,074
1,997
31,616
31,118
23,307
4,735
3,424
1,050
6.0
3.6
2.7
52.4
16.3
4.6
5.6
19.9
9.4
8.5
5.8
5.8
43.0
17.7
4.8
2.8
9.0
11.9
9.9
6.5
6.0
45.5
21.4
5.4
1.7
3.6
37.4
9.2
6.0
4.2
49.7
19.0
6.2
6.7
11.9
54.1
11.3
6.3
4.6
28.0
15.7
4.0
9.1
‐18.4
129.9
10.5
6.1
3.9
32.4
13.4
3.5
10.5
53.4
29.9
10.2
6.0
4.2
39.9
17.1
5.1
8.3
7.7
81.8
9.9
5.3
3.6
33.1
15.0
3.8
9.7
14.0
78.2
a
Income statement/profitability numbers are annualised (3 months)
Peer Average – Comprises of audited numbers at financial year‐end (march 2007 for CF and PLC; December 2006 for CLC)
Legend ‐ CF: Central Finance PLC, PL: Peoples Leasing Co. PLC, CLC: Commercial Leasing Co. PLC, PM: Peoples Merchant Bank PLC, CeyL: Ceylease Financial Services PLC,
and SMB: Seylan Merchant Bank PLC
Source: Company annual reports/Quarterly financials
b
The company acquired a 17.9% stake in PRASAC ‐ a Cambodian‐based micro‐finance
institution – during FY07, through which it hopes to derive technical expertise and
synergies for its local operations over the medium‐ to longer term. Prospects · Profitability, although
witnessing a marginal
decline, compares well
with the sector at FYE07
· NIMs narrowed due to the
increase in funding costs,
driven by the upward shift
in market interest rates
during FY07
· NIM, although narrowing,
should remain healthy
over the medium term
· Operating lease and hire
rental income account for
around 50% of non‐interest
revenue
· LOLC’s operations are
relatively cost‐efficient
· Effective tax rates were
significantly lower than
peers during FY06 and
FY07
Lanka Orix Leasing Company PLC
November 2007 While the provision of motor vehicle finance is likely to dominate the company’s
lending portfolio over the short‐ to medium term, the management intends to
leverage on LOLC’s association with its foreign funding partners towards the
diversification and growth of its micro‐ and agro‐lending products. Micro‐ and agro‐
lending accounted for less than 2% of the group’s total lending base at end‐Q108. Performance LOLC’s leasing and hire purchase loans posted a 30% overall growth during FY07,
while other types of lending in total grew by a higher 64% over a smaller base. Loan
growth continued at an annualised rate of 33.8% during Q108 and is high compared
with the leasing industry in general, which witnessed a stifling of growth during the
period due to the prevalent weak macroeconomic conditions.
LOLC’s pre‐tax profit grew by 39.3% during FY07 compared to 25.0% in FY06. Pre‐
tax profit was underpinned by strong growth in total income earned during the
period, despite an increase in provisioning costs. However NIMs narrowed during the
period due to the increase in funding costs, which, together with higher
provisioning, resulted in a dip in pre‐tax ROA to 5.8% at FYE07, from 6.5% at FYE06.
The dip in LOLC’s post‐tax ROA was lower during FY07 due to a reduction in its
effective tax rates to 0.4% at FYE07 (from 6.6% at FYE06).
LOLC’s effective tax rates were significantly lower than a peer average of 31.0% at
FYE07. This is due to the company utilising half of its accumulated tax losses from
accounting periods up to FY06 for the recognition of a deferred‐tax asset during
FY07. Consequently LOLC’s post‐tax ROA compares well with peers’ at FYE07. The
company expects to recognise the remaining tax losses against taxable profit during
FY08.
3 Financial Institutions
As per amendments made at the recent 7 November 2007 National Budget, tax
losses incurred as a result of capital allowances on finance lease assets, which have
hitherto been deductible against total income earned during the period in arriving
at taxable profit, will only be deductible against income from the relevant lease
assets. This should come into effect from 1st April 2008. Consequently effective
taxes should increase across the leasing industry landscape in the future, with
companies that offer a sizeable portion of other forms of lending alongside finance
leases (such as loans and HPs) being affected to a larger extent than those whose
income is entirely derived from finance leases.
The above change, together with the depletion of accumulated tax losses that
could have been set off against future taxable profits, should increase LOLC’s
effective taxes to levels commensurate with the SLC sector over the medium term.
The resulting effect on the net income of subsequent periods could reduce post‐tax
ROA to levels more commensurate with the SLC sector.
Return on equity increased to 30.2% at FYE07 from 25.7% at FYE06, largely due to
the growth in LOLC’s capital base lagging behind the growth in net income over the
period.
Key Income Statement Figures as a % of Average Assets
Peer averageb
LOLC
Interest income
Interest expense
Net interest income
Non‐interest income
Operating costs
Pre‐provisioning profit
Provision charge
Tax charge
Net income
FYE07
15.33
8.44
6.89
4.31
4.82
6.38
0.59
0.02
5.77
FYE06
14.55
6.38
8.17
3.79
5.44
6.52
0.07
0.43
6.02
17.88
9.05
8.83
4.11
5.25
7.70
1.56
1.99
4.16
b
Includes audited figures as at latest FYE (March 2007 for CF and PLC, December 2006 for CLC)
Peers include: Central Finance PLC, Peoples Leasing Co. Ltd, and Commercial Leasing PLC
Source: Company Annual Reports
Net Interest Revenue
Non‐Interest Revenue
Composition (%)
Collections from
written off
contracts
Profit on early
terminations
Operating lease &
hire rental income
Profit on sale of
fixed assets
Forex gain
Royalty &
management fees
Others
Total
FYE07
6.1
FYE06
0.4
10.8
13.1
49.6
60.1
8.4
0.1
4.4
9.3
4.3
10.2
11.4
100.0
11.8
100.0
Source: LOLC Annual Reports
Lanka Orix Leasing Company PLC
November 2007 LOLC’s interest yield, though slightly lower than the peer average, is partly a
reflection of LOLC’s somewhat more creditworthy clientele, and partly a reflection
of the lower proportion of penal interest income recovered. LOLC’s net interest
revenue grew by 63.4% during FY07 (20.5% in FY06) on the back of high loan growth
and increasing lending rates over the period. However a more significant increase in
borrowing costs resulted in NIM contracting to 8.5% at FYE07 compared with 9.9% at
FYE06. The increase in funding costs was brought about by increasing market
interest rates during FY07. However the contraction in the company’s NIM is
mitigated to an extent by the fact that its sundry loan portfolio (which made up
around 35% of its lending at FYE07) contains a re‐pricing provision, allowing the
company to re‐price the lending rate at regular intervals. The management
maintains that such loans are currently being re‐priced on a semi‐annual or quarterly
basis. This, together with the upward revision of lending rates on new lease and HP
contracts during FY07, should contain the narrowing of NIMs to some extent.
Non‐Interest Revenue
Non‐interest revenue grew by 76% during FY07 compared to 10% during FY06,
accounting for 38% and 32% of total revenue at FYE07 and FYE06 respectively. Around
50% of non‐interest revenue consisted of operating lease and hire rental income as at
FYE07, which grew by 46% in nominal terms during FY07. The company also derives a
foreign exchange gain from the conversion of earnings on foreign exchange leases
that are extended to eligible corporate clients, as well as earnings on LOLC’s foreign
exchange deposits, into local currency (see Market Risk on page 7).
4 Financial Institutions
Operating Expenses
Operating Cost
Composition (%)
Staff costs
Depreciation
Administration
Marketing &
operations
Other
Total operating cost
base (LKRm)
FYE07
25.8
26.2
22.0
22.3
FYE06
26.5
29.4
18.1
22.2
3.7
100.0
824.4
3.9
100.0
599.9
Source: LOLC annual reports
· The availability of a re‐
pricing provision on LOLC’s
sundry loans mitigates
market risk to some extent
· Un‐hedged forex exposure
on borrowings was minimal
at around LKR54m at end‐
Q108 (2% of total forex
borrowings)
The increase in LOLC’s operating costs (excluding provisions) was higher at 37%
during FY07 compared to 14% at FYE06. This is partly attributable to the increase in
the number of employees to 414 at FYE07 from 346 at FYE06 due to the expansion
of its operations, along with an increase in average personal cost per employee
during the period. However the aforementioned expansion of LOLC’s operations has
remained cost‐effective, as indicated by the company’s ratio of operating
costs/average assets, which reduced to 4.82% at FYE07 from 5.44% at FYE06. The
company’s cost/income ratio declined to 43.0% at FYE07 from 45.5% at FYE06. Risk Management Credit Risk
LOLC’s credit risk management is supported by systems developed by ORIX and has
been refined over time, and is structured around clearly laid out procedures for
credit evaluation, approval, monitoring, and recovery. Loan applications are
prepared by personnel of varying levels of seniority depending on the level of
complexity associated with the credit appraisal process, on a case‐by‐case basis.
Likewise, facilities are approved on a hierarchical basis with delegated approval
limits.
LOLC’s delegated approval limits are somewhat higher than some of its peers’ and
enable relatively faster turnaround times on loan applications. However these limits
vary according to the inherent risk of the underlying facility and the nature of the
collateral pledged against them. For example, loans backed by machinery, short‐
term revolving loans, and guarantor‐backed loans command more stringent
appraisals and lower delegated approval limits than lease and HP contracts. While
branch managers are given the authority to approve leasing/HP contracts of up to
LKR2m in terms of total receivables, loans backed by machinery and guarantors in
general need to be submitted to the respective regional manager and the head of
credit risk management, respectively, for approval. In general, facilities above
LKR12m are referred to the executive committee, while all facilities above
LKR100m have to be referred to ORIX for approval.
SLCs and other non‐bank financial institutions (NBFIs) tend to cater to a client base
that is relatively less credit‐worthy than those that are catered to by commercial
banks, and, as such, are more susceptible to an economic downturn. Of this client
segment, the larger, more established, NBFIs such as LOLC cater to clients that are
relatively more creditworthy than the rest. This is generally borne out by larger
loan sizes and higher loan/value ratios (LTV), on average, among the top NBFIs.
Group Advances &
Operating Leases
Composition (%)
Finance lease
Hire purchase
Sundry loan
Mortgage loan
Micro & agro
Operating lease
Factoring
Margin trading
Gold‐backed
Q108 FYE07 FYE06
37.3 37.6 40.7
17.7 16.0 13.0
27.3 26.2 25.2
2.6
2.6
1.9
1.7
1.8
2.0
6.4
6.7
5.3
6.6
8.6 10.8
0.3
0.5
0.9
0.2
0.2
0.1
Source: LOLC
Lanka Orix Leasing Company PLC
November 2007 LOLC’s average loan sizes are typically within the LKR1m‐2m range, whilst its share
of loans above the LKR2m threshold is also relatively high. LTVs can typically reach
90% of the forced sale value (FSV) of the asset for leases on new vehicles, and 80%
for HP contracts based on used vehicles, but could be as low as 25% for loans
secured by a mortgage on the borrower’s own residence (which could prove
relatively harder to foreclose upon, compared with unoccupied land). The FSV is
determined by a pre‐approved panel of professional valuers or LOLC’s in‐house
valuer. It is further mandatory for the pledged assets to be insured via a
comprehensive cover, which is to be assigned in favour of LOLC.
LOLC’s NPLs stem mainly from its lease and HP portfolios, which accounted for 43%
and 22% respectively of total company lending at FYE07. The credit risk in the
lease/HP portfolio is mitigated to a large extent due to the company having
absolute ownership of the asset, and the provisions within the Finance Leasing Act
56 of 2000 and the Consumer Credit Act No 29 of 1982 that makes repossession
relatively straightforward. However, LOLC’s sundry loan portfolio (which accounted
for 35% of company lending at FYE07) is relatively more risky than traditional lease
and HP products in that although enjoying absolute ownership of the underlying
5 Financial Institutions
asset, the company has to resort to
lengthy litigation proceedings for
repossession. As such, the sundry loan
portfolio
would
justify
closer
monitoring and follow‐up.
LOLC’s exposure to micro‐finance — an
inherently
riskier
product
than
lease/HP/other loans — is minimal at
present and accounted for around 2% of
total group lending at end‐Q108.
Gross Loans vs. Gross NPL Ratio
(LKRm)
Gross loans (LHS)
Gross NPL % post‐write off (RHS)
Gross NPL % pre‐write off (RHS) (%)
14
12
10
8
6
4
2
0
14,000
12,000
10,000
8,000
6,000
4,000
FYE05
FYE06
FYE07
Q107
LOLC’s recoveries team has been
strengthened with the appointment of
Source: LOLC annual reports & MIS
dedicated recovery managers to handle
the portfolios of a designated number
of marketing officers. The legal department has been streamlined to expedite legal
recoveries. Certain recovery functions have also been outsourced to improve
effectiveness.
Non‐Performing Loans
The asset quality of LOLC’s loan book improved significantly at FYE06, with gross
NPLs falling to 1.7% of gross loans (from 11.3% at FYE05). This was largely due to a
write‐off of 69% of the company’s NPL base which was in arrears for over 24 months
at FYE06, as per the company policy which was implemented during the year. Fitch
notes that LOLC’s earnings are not affected by such write‐offs, as NPLs that are in
arrears for over 18 months are already fully provided for, as per the company’s
provisioning policy for doubtful debts.
The company wrote off a further 22% of NPLs at FYE07 as per the above policy.
LOLC’s gross NPL ratio increased to 2.8% and 5.6% at FYE07 and Q108 respectively
due to the increase in absolute NPLs, in parallel with the general trend experienced
across the industry. However the gross NPL ratio remains the lowest within the non‐
bank financial institution landscape, largely aided by the company’s year‐end write‐
off policy, which provides a lower base for new NPL accretion. However LOLC’s NPL
ageing remains favourable, with a significant portion of new NPL accretions
occurring due to temporary set‐backs in borrowers’ income levels, with the
majority of NPLs remaining within the ”3‐6 months” arrears category (see table on
NPL Analysis).
LOLC provides for its doubtful debts in line with the regulatory requirement. In
addition, the company also provides for doubtful debts on a case‐by‐case basis as
and when the recovery of a loan becomes doubtful. As per the above policy, NPLs in
the “3‐6 months in arrears” category are not covered by loan loss provisions unless
they are deemed to be un‐collectible on an individual basis. Consequent to the
increase in new NPLs within the “3‐6 months in arrears” category, LOLC’s solvency
(as measured by Fitch as NPLs
net
of
loan
loss
NPL Analysis
provisions/equity) worsened to
(%)
Q108 FYE07 FYE06
19.9% at Q108 from 9.0% at
NPL/gross loans
5.5
2.8
1.7
FYE07. Fitch observes that
Net NPL/equity
19.9
9.0
3.6
Loan loss reserves/NPL
9.4
11.9
37.4
LOLC’s large equity base should
Performing loans (LKRm)
9,130
9,345
7,109
be able to absorb further
Delinquent loans (LKRm)
5,761
4,208
2,694
deteriorations in solvency, to
NPLs (above 3 months ‐ LKRm)
823
378
161
some extent, in a rising‐NPL
(% of gross NPLs)
3–6 months in arrears
79.4
70.3
37.3
scenario.
The absence of a general
provision, together with LOLC’s
favourable NPL ageing, has
Lanka Orix Leasing Company PLC
November 2007 6–12 months in arrears
12–18 months in arrears
Above 18 months in arrears
14.0
3.4
3.1
16.6
9.2
3.9
27.2
15.5
20.0
Source: LOLC Management Information Systems
6 Financial Institutions
resulted in lower loan loss reserve (LLR) coverage of NPLs relative to most industry
peers. This is indicated by LLR/NPL ratios of 9.4% and 11.9% at Q108 and FYE07
respectively.
Market Risk
The maturity structure of assets and liabilities at FYE07 revealed a negative gap of
LKR828.8m in the “3‐12 months” maturity bucket (ie maturing liabilities exceed
maturing assets by LKR828.8m), with a further negative gap of LKR1472.2m in the
“above 60 month” maturity bucket. The above mismatches accounted for 5% and 9%
of rate sensitive liabilities, respectively.
By default, SLCs in the context of the local market have had to face a more
significant level of interest re‐pricing risk compared to banks, due to the fact that a
significant portion of their business contains leasing and hire purchase loans at
fixed rates, while funding (predominantly institutional borrowings) could potentially
be re‐priced depending on market conditions. LOLC’s foray into sundry loans in
recent times and the significant growth of these loans (to 35% of company lending
at FYE07) has mitigated this risk somewhat, due to a provision for the re‐pricing of
lending rates being available on the loans.
Additionally interest rates on new fixed‐rate originations have also been increased,
with average rates moving up to 28% in June 2007 from 20.75% in April 2006,
reducing market risk further.
The company has entered into an interest rate swap agreement to the value of
LKR500m with the local branch of a leading foreign bank, where LOLC has agreed to
pay a fixed rate for a period of two years (until 21 January 2008), in a bid to hedge
market risk on its borrowings to some extent. The company’s ability to further
hedge its interest rate risk is largely stifled, given that the local market for such
instruments is essentially under‐developed.
LOLC is exposed to some degree of foreign exchange (forex) risk due to its foreign
funding lines. However the company has hedged the forex risk on the entire
borrowed capital by depositing the funds with local banks and borrowing in LKR
against this. LOLC maintains that interest earned on the foreign currency deposits
mitigates the forex risk on interest payable to a large extent, leaving the net un‐
hedged exposure at around 2% of total foreign currency borrowings at end‐Q108.
This translates into approximately LKR54m for end‐Q108 forex deposit levels — not
a serious concern, in Fitch’s view, given the company’s profitability and overall
financial profile.
Operational Risk
· Capital position is strong
compared to peers’
· Internal capital generation
increased at FYE07 over a
higher capital base, due to
a lower payout of net
profit as dividends
· Equity/assets is on a
downward trend due to
high loan growth
· Access to public deposit
funding via LOFIN, a
wholly owned RFC
· Lower funding costs
compared to other SLCs’
Lanka Orix Leasing Company PLC
November 2007 LOLC’s operational risk is managed by clearly laid out operational procedures.
Adherence to such procedures is ensured by way of hierarchical review and
approval through internal audit. Independent evaluations of internal controls are
done through external audits. The internal control framework is further
strengthened by regular reviews carried out by ORIX, facilitated through regular
reporting and sign‐off. Funding and Liquidity Similar to other SLCs, LOLC’s funding largely consists of institutional borrowings
from the local market, which accounted for 45.4% of group assets at FYE07,
compared with 39.1% at FYE06. LOLC’s average cost of funds increased to 11.1% at
FYE07 from 8.9% at FYE06 due to increasing market interest rates over the period,
but remained lower than its peers’ within the SLC sector.
The company has managed to diversify its funding sources to some extent, on
account of borrowings from multilateral donor agencies. The continuous inflow of
such funds during FY07 and their relatively lower cost, together with LOLC’s large
7 Financial Institutions
equity base, helped suppress the
company’s cost of funds compared to
the SLC sector. The relatively lower
cost of such credit lines has also
improved LOLC’s ability to compete
aggressively among SLC sector peers,
concurrently
supporting
the
company’s
above‐average
loan
growth during FY07 and Q108.
LOLC Group Funding Mix
(%)
Foreign funding
Customer deposits
Local institutional
borrowings
Long term
Short term
Bank overdrafts
Finance lease liability
Other liabilities
Equity
Total
Q108
16.2
8.6
49.0
FYE07
16.1
8.0
45.4
FYE06
17.3
8.6
39.1
19.1
26.8
3.1
4.0
6.0
16.0
100.0
19.5
24.7
1.2
4.7
8.3
17.6
100.0
9.6
28.6
0.9
2.1
11.8
21.2
100.0
LOLC acquired an RFC licence in 2001
(via LOFIN), which allows for the
mobilisation of savings and time‐
Source: LOLC
deposits from the general public, in a
bid to improve the diversity in its
funding avenues. Although LOFIN’s deposit base has grown at a rapid pace (as
indicated by its compounded annual growth rate of 56.1%) between FYE05 and
FYE07, the overall effect on the group’s funding diversity is modest at present, with
customer deposits accounting for 8.6% of group assets at end‐Q108. Capital LOLC’s capital position has consistently been on a strong footing compared to other
SLCs’. The company’s equity reduced to 17.7% of total assets at FYE07 from 21.4%
at FYE06 due to high loan growth witnessed during FY07. LOLC’s dividend payout as
a percentage of net income reduced to 14% at FYE07 (from 18% at FYE06 and FYE05).
Incremental internal capital generation (measured as retained earnings of the
current period/equity base of the previous period) increased to 30% at FYE07 off a
higher equity base due to reduced payout of net income, compared to an average
of 23% between FYE04 – FYE06.
Although LOLC’s internal capital generation rate compares well with other SLCs’, it
may seem overstated, given the relatively higher growth of its loan book, which, if
maintained, would challenge the company’s strong absolute capital position over
the medium term.
Internal capital generation could be further constrained due to the possible
increase in effective tax rates over the medium term (see Performance section on
page 2).
Loan Growth vs Capital Position
Loan growth
Internal capital generation
Equity/total assets
(%)
45
38
30
23
15
8
0
FYE04
FYE05
FYE06
FYE07
Source: LOLC, Fitch
Lanka Orix Leasing Company PLC
November 2007 8 Financial Institutions
Lanka ORIX Leasing Company PLC Balance Sheet Analysis
Year end
(USDm)
A. Loans
1 Customer loans
2 Other loans
3 (Loan loss reserves)
4 (Interest in suspense)
Total A
B Other earning assets
1 Deposits with banks
2 Treasury bills
3 Other securities
4 Equity investments
Total B
C Total earning assets (A+B)
D Fixed assets
E Non‐earning assets
F Total assets
G Customer and short term funding
1 Time deposits
2 Other deposits
Total G
H Borrowings
I Other (non‐int. bearing)
J Total liabilities
K Equity
L Total liabilities & equity
Exchange rate
123.89
0.00
‐0.41
0.00
123.47
0.00
29.41
0.00
0.00
14.14
43.56
167.03
14.30
9.60
190.93
0.00
0.00
0.00
148.53
8.63
157.16
33.77
190.93
USD1 = LKR
31 Mar 07
Year end
As % of
(LKRm)
assets
13,553.79
0.00
‐45.27
0.00
13,508.51
0.00
3,217.74
0.00
0.00
1,547.46
4,765.20
18,273.71
1,564.85
1,050.13
20,888.69
0.00
0.00
0.00
0.00
16,250.17
944.23
17,194.41
3,694.29
20,888.69
109.4056
Average
(LKRm)
64.89
0.00
‐0.22
0.00
64.67
11,607.22
0.00
‐52.93
0.00
11,554.29
15.40
0.00
0.00
7.41
22.81
87.48
7.49
5.03
100.00
2,236.91
0.00
0.00
1,258.40
3,495.31
15,049.61
1,231.17
812.57
17,093.34
0.00
0.00
0.00
77.79
4.52
82.31
17.69
100.00
0.00
0.00
0.00
13,037.15
783.93
13,821.07
3,272.27
17,093.34
31 Mar 06
Year end
As % of
(LKRm)
assets
9,660.66
0.00
‐60.58
0.00
9,600.08
0.00
1,256.08
0.00
0.00
969.34
2,225.42
11,825.50
897.48
575.01
13,297.99
0.00
0.00
0.00
0.00
9,824.12
623.62
10,447.73
2,850.25
13,297.99
USD1 = LKR
72.65
0.00
‐0.46
0.00
72.19
9.45
0.00
0.00
7.29
16.74
88.93
6.75
4.32
100.00
0.00
0.00
0.00
73.88
4.69
78.57
21.43
100.00
102.8006
31 Mar 05
Year end
As % of
(LKRm)
assets
7,096.67
0.00
‐644.99
0.00
6,451.68
0.00
882.14
0.00
0.00
335.24
1,217.38
7,669.06
608.47
468.53
8,746.06
0.00
0.00
0.00
0.00
6,024.53
414.07
6,438.61
2,308.13
8,746.74
USD1 = LKR
81.14
0.00
‐7.37
0.00
73.77
10.09
0.00
0.00
3.83
13.92
87.69
6.96
5.36
100.00
0.00
0.00
0.00
68.88
4.73
73.62
26.39
100.01
99.4111
31 Mar 04
Year end
As % of
(LKRm)
assets
6,203.41
0.00
‐608.11
0.00
5,595.29
0.00
812.92
0.00
0.00
368.90
1,181.82
6,777.11
555.81
282.07
7,615.00
0.00
0.00
0.00
0.00
5,395.67
376.66
5,772.33
1,844.35
7,616.68
USD1 = LKR
81.46
0.00
‐7.99
0.00
73.48
10.68
0.00
0.00
4.84
15.52
89.00
7.30
3.70
100.00
0.00
0.00
0.00
70.86
4.95
75.80
24.22
100.02
97.4178
Source: LOLC, Fitch
Lanka Orix Leasing Company PLC
November 2007 9 Financial Institutions
Income Statement Analysis
1 Interest income
2 Interest expense
3 Net interest revenue
4 Other operating income
5 Total income
6 Provision for loan losses
7 Provision others
8 Personnel expenses
9 Other non int. expenses
10 Total expenses
11 Pre tax profit
12 Taxes
13 Net income
31 Mar 07
Income expenses
As % of total AV
(LKRm)
assets
2,621.17
15.33
1,442.88
8.44
1,178.29
6.89
737.15
4.31
1,915.44
11.21
68.49
0.40
32.37
0.19
212.75
1.24
611.65
3.58
925.25
5.41
990.19
5.79
3.59
0.02
986.59
5.77
31 Mar 06
Income expenses
As % of total AV
(LKRm)
assets
1,604.00
14.55
703.40
6.38
900.60
8.17
418.12
3.79
1,318.71
11.96
3.93
0.04
3.97
0.04
158.86
1.44
441.02
4.00
607.78
5.51
710.93
6.45
46.92
0.43
664.01
6.02
31 Mar 05
Income expenses
As % of total AV
(LKRm)
assets
1,331.35
16.27
532.30
6.51
799.05
9.77
380.89
4.66
1,179.95
14.42
82.98
1.01
0.00
0.00
141.24
1.73
386.94
4.73
611.16
7.47
568.79
6.95
6.56
0.08
562.23
6.87
31 Mar 04
Income expenses As % of total AV
(LKRm)
assets
1,446.45
21.28
493.34
7.26
953.11
14.02
59.65
0.88
1,012.76
14.90
58.29
0.86
0.00
0.00
101.97
1.50
434.60
6.39
594.86
8.75
417.91
6.15
0.00
0.00
417.91
6.15
Source: LOLC, Fitch
Lanka Orix Leasing Company PLC
November 2007 10 Financial Institutions
Ratio Analysis
(%)
I Profitability level
1 Net interest margin
2 Pre‐tax profit/total assets (av.)
3 Net income/equity (av.)
4 Net income/total assets (av.)
5 Total non‐int. expense (excl.prov.)/net int. rev.+ other operating income
6 Net interest rev./total assets (av.)
II Capital adequacy (year end)
1 Equity/total assets
2 Equity/loans
3 Capital/risks – tier 1
4 Net NPLs/equity
III Liquidity (year end)
1 Liquid assets/customer & short term funding
2 Loans/customer & short term funding
IV Asset Quality
1 Loan loss provisions/loans (av.)
2 Loan loss reserves/loans
3 Loan loss reserves/NPLs
4 Non performing loans/gross loans
31 Mar 07
31 Mar 06
31 Mar 05
31 Mar 04
8.49
5.79
30.15
5.77
43.04
6.89
0.00
17.69
27.35
20.91
9.03
9.78
6.45
25.74
6.02
45.49
8.17
0.00
21.43
29.69
23.67
3.56
11.41
6.95
27.08
6.87
44.76
9.77
0.00
26.39
35.78
29.35
7.31
16.16
6.15
23.73
6.15
52.98
14.02
0.00
24.22
32.96
27.11
8.85
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
0.59
0.33
11.95
2.80
0.05
0.63
37.42
1.68
1.25
9.09
79.26
11.30
1.03
9.80
78.84
12.11
Source: LOLC, Fitch
Lanka Orix Leasing Company PLC
November 2007 11 Financial Institutions
Lanka ORIX Leasing Company PLC (Consolidated) Balance Sheet Analysis
Year end
(USDm)
A Loans
1 Customer loans
2 Other loans
3 (Loan loss reserves)
4 (Interest in suspense)
Total A
B Other earning assets
1 Deposits with banks
2 Treasury bills
3 Other securities
4 Equity investments
Total B
C Total earning assets (A+B)
D Fixed assets
E Non‐earning assets
F Total assets
G Customer and short term funding
1 Time deposits
2 Other deposits
Total G
H. Borrowings
I. Other (non‐int. bearing)
J. Total liabilities
K. Equity
L. Total liabilities & equity
Exchange rate 147.33
0.00
‐1.01
0.00
146.32
0.00
31.79
0.00
0.00
4.98
36.77
183.09
14.76
25.23
223.07
15.96
0.00
15.96
155.40
16.59
187.95
35.13
223.07
USD1 = LKR 31 Mar 07
Year end
As % of
(LKRm)
assets
16,119.01
0.00
‐110.50
0.00
16,008.51
0.00
3,477.50
0.00
0.00
544.85
4,022.35
20,030.86
1,614.96
2,759.78
24,405.61
0.00
1,746.16
0.00
1,746.16
17,001.43
1,814.82
20,562.41
3,843.19
24,405.61
109.41 Average
(LKRm)
66.05
0.00
‐0.45
0.00
65.59
13608.34
0.00
‐99.68
0.00
13508.65
14.25
0.00
0.00
2.23
16.48
82.07
6.62
11.31
100.00
2448.50
0.00
0.00
524.60
2973.09
16481.75
1280.01
2554.40
20316.15
7.15
0.00
7.15
69.66
7.44
84.25
15.75
100.00
1470.21
0.00
1470.21
13738.19
1720.57
16928.97
3387.18
20,316.15
31 Mar 06
Year end
As % of
(LKRm)
assets
11,097.66
0.00
‐88.87
0.00
11,008.80
0.00
1,419.50
0.00
0.00
504.34
1,923.83
12,932.63
945.05
2,349.01
16,226.69
0.00
1,194.26
0.00
1,194.26
10,474.95
1,626.31
13,295.52
2,931.17
16,226.69
USD1 = LKR 68.39
0.00
‐0.55
0.00
67.84
8.75
0.00
0.00
3.11
11.86
79.70
5.82
14.48
100.00
7.36
0.00
7.36
64.55
10.02
81.94
18.06
100.00
102.8006 31 Mar 05
Year end
As % of
(LKRm)
assets
7,766.54
0.00
‐649.58
0.00
7,116.96
0.00
1,257.55
0.00
0.00
99.61
1,357.16
8,474.12
646.81
1,585.51
10,706.44
0.00
716.21
0.00
716.21
6,634.29
991.53
8,342.03
2,364.41
10,706.44
USD1 = LKR 72.54
0.00
‐6.07
0.00
66.47
11.75
0.00
0.00
0.93
12.68
79.15
6.04
14.81
100.00
6.69
0.00
6.69
61.97
9.26
77.92
22.08
100.00
99.4111 31 Mar 04
Year end
As % of
(LKRm)
assets
6,461.18
0.00
‐608.11
0.00
5,853.06
0.00
1,036.72
0.00
0.00
203.29
1,240.01
7,093.08
598.14
1,295.53
8,986.75
0.00
196.62
0.00
196.62
5,951.75
914.90
7,063.27
1,923.48
8,986.75
USD1 = LKR 71.90
0.00
‐6.77
0.00
65.13
11.54
0.00
0.00
2.26
13.80
78.93
6.66
14.42
100.00
2.19
0.00
2.19
66.23
10.18
78.60
21.40
100.00 97.4178 Source: LOLC, Fitch
Lanka Orix Leasing Company PLC
November 2007 12 Financial Institutions
Income Statement Analysis
1 Interest income
2 Interest expense
3 Net interest revenue
4 Other operating income
5 Total income
6 Provision for loan losses
7 Provision others
8 Personnel expenses
9 Other non int. expenses
10 Total expenses
11 Pre tax profit
12 Taxes
13 Net income
31 Mar 07
Income expenses
As % of total AV
(LKRm)
assets
3,107.81
15.30
1,876.39
9.24
1,231.42
6.06
1,171.35
5.77
2,402.78
11.83
114.13
0.56
32.37
0.16
351.36
1.73
801.03
3.94
1,298.89
6.39
1,103.89
5.43
49.28
0.24
1,054.61
5.19
31 Mar 06
Income expenses
As % of total AV
(LKRm)
assets
1,858.61
13.80
939.12
6.97
919.49
6.83
861.55
6.40
1,781.04
13.23
71.00
0.53
5.29
0.04
304.40
2.26
650.81
4.83
1,031.51
7.66
749.53
5.57
60.94
0.45
688.59
5.11
31 Mar 05
Income expenses
As % of total AV
(LKRm)
assets
1,420.19
14.42
617.60
6.27
802.59
8.15
631.92
6.42
1,434.51
14.57
99.28
1.01
0.00
0.00
227.04
2.31
514.13
5.22
840.45
8.54
594.06
6.03
18.86
0.19
575.20
5.84
31 Mar 04
Income expenses
As % of total AV
(LKRm)
assets
1,254.44
19.97
552.77
8.80
701.67
11.17
524.04
8.34
1,225.71
19.51
78.37
1.25
0.00
0.00
159.98
2.55
584.91
9.31
823.26
13.10
402.44
6.41
‐1.99
‐0.03
404.44
6.44
Source: LOLC, Fitch
Lanka Orix Leasing Company PLC
November 2007 13 Financial Institutions
Ratio Analysis
I Profitability level
1 Net interest margin
2 Pre‐tax profit/total assets (av.)
3 Net income/equity (av.)
4 Net income/total assets (av.)
5 Total non‐Int. expense (excl.prov.)/net int. rev.+ other operating income
6 Net interest rev./total assets (av.)
II Capital adequacy (year end)
1 Equity/total assets
2 Equity/loans
3 Capital/risks ‐ tier 1
4 Net NPLs/equity
III Liquidity (year end)
1 Liquid assets/customer & short term funding
2 Loans/customer & short term funding
IV Asset quality
1 Loan loss provisions/loans (av.)
2 Loan loss reserves/loans
3 Loan loss reserves/NPLs
4 Non performing loans/gross loans
31 Mar 07
31 Mar 06
31 Mar 05
31 Mar 04
7.52
5.43
31.14
5.19
47.96
6.06
0.00
15.75
24.01
18.36
15.12
0.00
0.00
0.00
0.00
0.84
0.69
15.98
4.29
8.59
5.57
26.01
5.11
53.63
6.83
0.00
18.06
26.63
19.80
9.67
0.00
0.00
0.00
0.00
0.75
0.80
23.88
3.35
10.31
6.03
26.83
5.84
51.67
8.15
0.00
22.08
33.22
25.02
17.05
0.00
0.00
0.00
0.00
1.40
8.36
61.71
13.55
11.26
5.02
21.93
5.05
60.77
8.76
0.00
21.40
32.86
24.19
28.12
0.00
0.00
0.00
0.00
1.35
9.41
52.98
17.78
Source: LOLC. Fitch
Lanka Orix Leasing Company PLC
November 2007 14 Financial Institutions
Copyright © 2007 by Fitch, Inc., Fitch Ratings Ltd. and its subsidiaries. One State Street Plaza, NY, NY 10004.Telephone: 1‐800‐753‐4824,
(212) 908‐0500. Fax: (212) 480‐4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights
reserved. All of the information contained herein is based on information obtained from issuers, other obligors, underwriters, and other
sources which Fitch believes to be reliable. Fitch does not audit or verify the truth or accuracy of any such information. As a result, the
information in this report is provided "as is" without any representation or warranty of any kind. A Fitch rating is an opinion as to the
creditworthiness of a security. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically
mentioned. Fitch is not engaged in the offer or sale of any security. A report providing a Fitch rating is neither a prospectus nor a
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adequacy of market price, the suitability of any security for a particular investor, or the tax‐exempt nature or taxability of payments made
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Lanka Orix Leasing Company PLC
November 2007 15