Fitch publishes AMW Capital Leasing rating of ‘BB- ‘/Stable
Monday, 7 October 2013 00:00
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Key rating drivers
The rating reflects its relatively weak deposit franchise amongst finance companies, modest capitalisation, satisfactory asset-quality and small market share. AMCL’s rating is a reflection of its stand-alone financial strength, and as such already factors in ordinary support from parent Associated Motorways Ltd. (AMW).
AMCL’s customer deposits amounted to Rs. 78 million (2% of the total funding), reflecting its weak deposit franchise. This is partly due to AMCL’s conversion to a Licensed Finance Company (LFC) in 2008, from a Specialised Leasing Company (SLC), which is not allowed to mobilise deposits. AMCL is funded primarily through borrowings from AMW and banks (56% and 42% of funding, respectively at end-June 2013).
Liquidity pressure may increase for AMCL if the current weak economic climate persists because banks may reduce their exposure to smaller LFC’s such as AMCL. AMCL’s liquidity profile remains weak as liabilities that mature in less than a year exceed assets with similar maturity by Rs. 1.1 billion at end H113 (equivalent to 129% of equity). This gap, however, is similar to that at similarly rated peers. Borrowings from AMW and loans guaranteed by AMW accounted for 77.4% of AMCL’s liabilities that mature in less than a year.
AMCL’s ratio of equity to total assets stood at 16.6% at end-H113 (end-2012: 15.9%) and was in line with that of similarly rated domestic peers. However Fitch expects AMCL’s capitalisation to decline due to its expanding operation but to remain at a satisfactory level for its current rating.
AMCL’s profitability, as measured by return on assets (ROA), remained flat at 3.3% (annualised) for the six months to end-June 2013 (2012: 3%) despite an increase in net interest margin (NIM) and low operating cost. This was mainly due to a decrease in non-interest income and an increase in impairment cost.
Non-interest income decreased mainly due to low net insurance income, which accounted for 23% of total non-interest income in H113 (2012: 30%). Fitch expects ROA to remain under pressure in the short- to medium-term, in line with the sector, due to intense competition and an economic slowdown.
AMCL’s regulatory non-performing loans (NPL) over three months were at 5.4% of total loans at end-H113 (end-2012:4.2%), while its NPL ratio over the six months to end-H113 remained below 1%, which was better than similarly rated domestic peers. Fitch expects asset quality to come under pressure amid a weaker economic climate - this is in line with the agency’s view for the non-bank financial institutions sector.
AMCL has provided modest impairment reserves cover of 85% for its regulatory NPLs at end-H113 (end 2012: 106%), which was similar to coverage for ‘BB(lka)’ rated domestic peers.
Rating sensitivities
Deterioration in the company’s liquidity profile, asset quality, or capitalisation relative to its peers would place downward pressure on AMCL’s rating. The development of its franchise, while maintaining its financial profile relative to higher-rated peers may lead to a positive rating action.
AMCL is 90% owned by AMW, a large domestic importer of motor vehicles. AMW set up AMCL with the objective of supporting its vehicle financing business.
AMCL mainly provides vehicle finance in the form of leases, hire purchase, and loans. At end-June 2013, leases accounted for 67% of total advances, hire purchase 23% and loans 10%.
