PACRA foresees weakening performance of leasing companies

The Pakistan Credit Rating Agency Limited (PACRA) foresees weakening performance of leasing companies - a consequence of tough operating environment amid tight credit conditions and soaring cost of funds. Business risk is also amplified as both consumers and commercial borrowers are impacted by the recent economic downturn. Meanwhile, leasing companies have made their financing terms stricter to lessen the impact of deterioration in asset quality.
The companies have shifted their focus to good quality credit as against the previous practice of following a high growth strategy, pointing towards likely reduction in the size. According to Humaira Jamil, Rana Mohammad Nadeem, Rai Umar Zafar and Samiya Mukhtar, PACRA analysts, in the recent past, non-banking financial sector witnessed consolidation.
Various companies, operating with single license, diversified their businesses by obtaining multiple licenses to expand the range of operations and services. PACRA believes further consolidation in the sector is needed to withstand the ongoing financial pressures. However, the companies enjoying association with large and financially sound business groups are expected to maintain their financial standing.
The companies in PACRA's rating universe (ORIX Leasing, Standard Chartered Leasing, and Askari Leasing) are financially sound though the performance of these companies may come under pressure in the short-term. At the same time, these are expected to maintain their robust financial health and ability to honour financial commitments in a timely manner. Moreover, PACRA also draws comfort from strong percentage, with proven demonstration, of established local and multinational business groups while reviewing the ratings.
ORIX Leasing Pakistan Limited (OLP): The ratings (Entity long term: AA, Short-term: A1+) reflect OLP's sustained position as a market leader, the stability and expertise of its management and demonstrated support from its parent company - ORIX Corporation, Japan. At the same time, the adjustment in the long-term rating recognises the impending pressure on the performance prospects owing to weakening dynamics of the leasing sector. The subdued economic environment has amplified the business risk reflected in squeezed and limited growth prospects.
Standard Chartered Leasing Limited (SCLL): The ratings (Long term: A+, Short term: A1) recognise SCLL's strong association with Standard Chartered Bank (Pakistan) Limited (SCBPL), rated AAA by PACRA. SCBPL has reaffirmed its support through a recent equity infusion (current ownership: 86.5%) alongside developing an experienced management team. The ratings also incorporate the liquidity and funding comfort SCLL is enjoying in the form of preferential credit lines from various financial institutions as well as its own parent at relatively better rates in an era where the whole leasing sector is facing a challenging environment with restricted access to funds.
Continuing strong support from SCBPL would remain decisive factor for the ratings. At the same time pronunciation of management's initiatives to address company's key weaknesses while strengthening its financial and business profile would be critical for the ratings.
Askari Leasing Limited (ALL): The ratings (Long term: A+, Short term" A1) reflect the company's strong risk absorption capacity emanating from its sound financial profile. Earlier the management had been pursuing an aggressive expansion in its loan book.
However, recognising increasing pressure on asset quality and challenging economic dynamics, the company has lately adopted a conservative business strategy. Moreover, to arrest the increasing trend in NPLs, the company has brought further improvements in its management framework while focusing on recoveries.
The ratings are assigned a negative outlook recognising the pressure on the overall leasing sector and concerns on the company's ability to maintain its performance prospects and particularly the asset quality in the increasingly tough market conditions. Meanwhile, any deterioration in liquidity profile of the company and/or significant weakening in asset quality may negatively impact the ratings.