32% N.P.L. Ratio
People’s Leasing Finance PLC’s (PF’s) asset quality deteriorated sharply in Q209, and it is attributed to operational lapses amid a period of uncertainty and turbulence prior to People’s Leasing Company Ltd.’s (PL’s) takeover, a rating agency said. However, asset quality has since improved somewhat, with PF’s gross non-performing loan (N.P.L.) ratios (Fitch defines N.P.L.s as advances in arrears for over three months) improving to 31.54% at FYE09 from a peak of 42.87% at end-Q209.
Fitch Ratings on Tuesday (January 26) affirmed P.F.’s National Long-term rating at ‘BBB-(lka)’ with a stable outlook.
Ceylinco Consolidated Group which owned P.F. (formerly Seylan Merchant Leasing PLC) until PL’s acquisition in June 2009, faced severe liquidity stress in early 2009.
This was due to a deposit run on an unregulated entity within the Ceylinco
group towards end 2008. The resultant crisis of confidence permeated into the wider registered finance company (R.F.C.) sector, which caused P.F.’s customer deposits to contract by 13% in Q109.
However the contraction eased in Q209 (to 6%) supported by P.L.’s takeover and subsequent effort in re-branding; thereafter, PF’s deposits grew by 11% in H209.
P.F.’s rating is driven by the expectation that support will be forthcoming from its parent (PL, ‘A-(lka)’/Stable, which owns 97% of P.F.), should the need arise.
P.F.’s R.F.C. license enables its parent, a specialised leasing company, to diversify its funding channels and reduce funding costs through the acquisition of public deposits, which underscores P.F.’s importance to the PL group.
As at November 30, 2009, PF’s deposits funded 5% of PL’s consolidated assets.
Fitch also notes that PF’s asset quality could improve further in 2010 given the company’s “concerted recovery” efforts and improving economic activity.
Nevertheless the agency expects P.F.’s asset quality to remain weak in 2010 relative to levels seen prior to 2008, which is in line with
Fitch’s expectation for the domestic leasing and finance company sector.
P.F. reported a marginal profit of LKR3m in Q409 after a cumulative post-tax loss of LKR130m at end-Q309.
The losses were driven by a one-off spike in credit costs in Q209 but the pace of increase in credit costs has slowed sharply in H209 due to PF’s
“concerted” recovery efforts. Fitch expects PF’s profitability to strengthen further in 2010 as asset quality normalises and a greater proportion of its deposits are re-priced amid the current low interest rate environment.
People’s Bank owns a 1.78% share in Fitch Ratings Lanka Ltd. No shareholder other than Fitch Ratings Ltd U.K., is involved in the day-to-day operations of, or credit rating reviews undertaken by Fitch Ratings Lanka Ltd.
