TRIS Rating Co., Ltd. has upgraded the company rating of Ayudhya Development Leasing Co., Ltd. (ADLC) to “A” from “A-” with “stable” outlook. The upgrade reflects the increased credit enhancement from ADLC’s stand-alone rating. The enhancement is a consequence of stronger support from its parent company, Bank of Ayudhya PLC (BAY), as ADLC is considered as a strategic subsidiary of BAY in industrial machinery and equipment leasing business in the “Solo Consolidation” finance business group under the Consolidated Supervision rules of the Bank of Thailand (BOT). BAY has been rated by TRIS Rating at “AA-” with a “stable” outlook. ADLC’s stand-alone rating reflects its strong market position in the industrial machinery and equipment leasing industry, a capable and experienced management team with a proven track record, its ability to expand its loan portfolio and operating costs, which have continued to remain low. However, the strengths are mitigated by the generally weaker credit profiles of the company’s target customers who are considered to be more vulnerable to changes in economic conditions than the customers of commercial banks. In addition, ADLC also carries high customer concentration risk and a weakening capital base due to a debt-financed portfolio expansion.
The “stable” outlook reflects TRIS Rating’s expectation that ADLC’s business direction will continue to be closely aligned with BAY’s business strategy, and the company will continue to get strong support from BAY. The outlook also considers the ability of ADLC’s management team to sustain the company’s strong market position in its core business, deliver satisfactory financial performance, as well as control asset quality, and maintain an adequate allowance for doubtful accounts. In addition, the company is expected to maintain a sufficient capital base as an additional cushion to offset the relatively high credit risk profile of its target customers.
TRIS Rating reported that BAY has implemented a universal banking policy and positioned ADLC as a strategic entity to penetrate the industrial machinery and equipment leasing industry since 2004. In 2008, ADLC became a 99.99%-owned subsidiary of BAY. The company consequently became more closely aligned with BAY’s business strategy, providing services to both BAY customers and others. The business and financial support provided by BAY has enhanced ADLC’s market position in its core businesses and improved its financial flexibility. Currently, excluding bills of exchange, all of ADLC’s borrowings are from BAY. All of ADLC’s operating activities are monitored and controlled by BAY. ADLC has also developed continuously the risk management tools suitable for the industrial machinery and equipment leasing business. The development of these tools has been supported by BAY while the tools themselves are in line with the bank’s policy guidelines set by the BOT.
The outstanding loans of the 12 major leasing companies in TRIS Rating’s database decreased in 2009 due to unfavorable economic environment. However, ADLC’s market position has improved. The total amount of outstanding loans of 12 major leasing companies in 2009 was Bt40,059 million, a 5.86% drop from Bt42,552 million in 2008, compared with growth of 4.14% and 3.62% in 2007 and 2008, respectively. Of the 12 leasing companies, ADLC was the second-largest in terms of total outstanding loans in 2009. ADLC held the first place in 2007, but dropped in rank due to the merger of two major Japanese lease providers in 2008. However, ADLC’s market share rose to 21.13% in 2009 from 17.3% in 2008, very closely behind the market leader which held 21.14%.
In 2010, ADLC reported net interest and dividend income (including net operating lease income) of Bt384 million, up 16% from Bt331 million in 2009. The improvement in net interest and dividend income mirrored the 20.4% growth in its loan portfolio (including net operating lease assets). The loan portfolio rose to Bt10,194 million in 2010 from Bt8,466 million in 2009. ADLC’s management team has a capability to initiate structured products suitable for specific customers, instead of offering plain vanilla leasing products as other operators do. The structured products have enabled the company to penetrate niche markets and consistently expand its loan portfolio, despite during an unfavorable business environment. However, the substantial growth of the loan portfolio during the past three years was mostly financed through new borrowings. The capitalization ratio has reduced, as shown by the reduction in the ratio of shareholders’ equity to total assets which fell to 13.5% in 2010 from 18.5% in 2007.
TRIS Rating said ADLC’s net income increased to Bt223 million in 2010 from Bt147 million in 2009. The ratio of non-performing loans (NPL) (net of cash deposits) to average loans (net of cash deposits) decreased to 4.4% at the end of 2010 from 6.7% in 2009, while the ratio of allowance for doubtful accounts to total loans decreased to 3.0% in 2010 from 3.4% in 2009. The improvement in the NPL ratio was partly due to the loan portfolio expansion in 2010.
The company’s target customers are small and medium enterprises (SME), which normally are more vulnerable to changing economic and business conditions than large firms. This means that ADLC has a higher probability of credit risk from loan quality deterioration when the economy falters. In addition, as ADLC has focused on large-sized SMEs, the company has a high customer concentration risk. Although the ratio of outstanding hire purchase and financial lease loans to total outstanding hire purchase and financial lease loans for its top-ten lessees accounted for 30.9% in 2010, down from 40.0% and 36.6% in 2008 and 2009, respectively, the ratio is considered high. However, ADLC has benefited from its focus on big-ticket customers in terms of lower operating costs. In 2010, the ratio of operating expenses to total income decreased to 10.9% from 11.5% in 2009, which was less than the 20%-30% levels recorded by peers. -- End
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