TRIS Rating has affirmed the company rating of Ayudhya Development Leasing Co., Ltd. (ADLC) at “A” with “stable” outlook. The rating reflects a 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 “AA-” by TRIS Rating with a “stable” outlook.
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, control asset quality, and maintain an adequate allowance for doubtful accounts. In addition, the company is also 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 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, and abilities to expand its loan portfolio, and keep operating costs 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. ADLC still carries a high customer concentration risk, despite becoming more diversified than last year. The effect of the severe flood on the company’s loan quality may be an added concern. Moreover, ADLC’s capital base is weakening, due to a debt-financed portfolio expansion.
TRIS Rating said, since 2004, BAY has implemented a universal banking policy and positioned ADLC as a strategic entity to penetrate the industrial machinery and equipment leasing industry. 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’s 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 in compliance with the rules set by the BOT.
The value of the outstanding loans made by the 11 major leasing companies in TRIS Rating’s database sharply increased in 2011, due to a rising economy. ADLC’s market position has improved and it has become the market leader. In 2011, the total amount of outstanding loans of the 11 major leasing companies was Bt57,967 million, a 34.7% rise from a value of Bt43,038 million in 2010, compared with year-on-year (y-o-y) growth of 8.7% in 2010. Of the 11 leasing companies, ADLC was the largest in terms of total outstanding loans in 2011. ADLC held the first place in 2007, but dropped in rank due to the merger of two major Japanese lease providers in 2008. ADLC returned to the top spot in 2011 with a market share of 25.9%, up from 23.7% in 2010. The improvement in share was mainly ADLC expansion more rapidly than the industry average.
In 2011, ADLC reported net interest and dividend income (including net operating lease income) of Bt449 million, up 17.1% from Bt384 million in 2010. The improvement in net interest and dividend income mirrored the 47.1% growth in its loan portfolio (including net operating lease assets). The loan portfolio rose to Bt14,992 million in 2011 from Bt10,194 million in 2010. ADLC’s management team has the capability to initiate structured products suitable for specific customers, instead of offering plain vanilla leasing products as other lessors do. The structured products have enabled the company to penetrate niche markets and consistently expand its loan portfolio, even during unfavorable business condition. However, the substantial growth of the loan portfolio during the past four years was mostly financed through new borrowings. The capitalization ratio has fallen, as shown by the reduction in the ratio of shareholders’ equity to total assets. This ratio fell to 10.7% in 2011 from 18.5% in 2007.
ADLC’s net income was Bt458 million in 2011, a 105.8% rise from Bt223 million in 2010. Net income rose because ADLC’s business grew and because a one-time recognition of a deferred tax liability reduced ADLC’s taxes. Excluding the tax savings, ADLC had a profit of Bt323 million, which was still 44.8% higher than net income in 2010. The ratio of non-performing loans (NPLs, net of cash deposits) to total loans (net of cash deposits), increased to 9.0% at the end of 2011, from 6.1% in 2010. The deterioration in the NPL ratio was due to the effect of the severe flood in the last quarter of 2011. Although the NPL ratio improved to 5.5% (unaudited) at the end of June 2012, ADLC’s ability to control its loan quality needs time to be demonstrated. In addition, the ratio of allowance for doubtful accounts to total loans continuously decreased to 2.00% in 2011, from 2.30% in 2010 and 2.34% in 2009.
ADLC’s target customers are small- and medium-sized enterprises (SMEs), which are normally more vulnerable to changing economic and business conditions than large firms. ADLC thus has a higher probability of credit risk should the quality of its loan portfolio deteriorate when the economy falters. In addition, as ADLC has focused on large-sized SMEs, the company has a high level of customer concentration risk. ADLC has tried to mitigate the concentration risk by diversifying its customer base, reflecting in the reduction of the proportion of outstanding hire purchase and financial lease loans made to its top 10 lessees compared with the total outstanding hire purchase and financial lease loans. The outstanding loans made to its top 10 customers accounted for 23.4% to total outstanding hire purchase and financial lease loans in 2011, down from 40.0%, 36.6% and 30.9% in 2008, 2009, and 2010, respectively. However, because of its focus on big-ticket customers, ADLC has benefited from lower operating costs. In 2011, the ratio of operating expenses to total income decreased to 7.9% from 10.9% in 2010, which was less than the 20%-30% levels recorded by peers, said TRIS Rating. — End
Company Rating: Affirmed at A Rating Outlook: Stable
TRIS Rating Co., Ltd./www.trisrating.com Contact: santaya@trisrating.com, Tel: 0-2231-3011 ext 500/Silom Complex Building, 24th Floor, 191 Silom Road, Bangkok 10500, Thailand Copyright 2012, TRIS Rating Co., Ltd. All rights reserved. Any unauthorized use, disclosure, copying, republication, further transmission, dissemination, redistribution or storing for subsequent use for any purpose, in whole or in part, in any form or manner or by any means whatsoever, by any person, of the credit rating reports or information is prohibited. The credit rating is not a statement of fact or a recommendation to buy, sell or hold any debt instruments. It is an expression of opinion regarding credit risks for that instrument or particular company. The opinion expressed in the credit rating does not represent investment or other advice and should therefore not be construed as such. Any rating and information contained in any report written or published by TRIS Rating has been prepared without taking into account any recipient’s particular financial needs, circumstances, knowledge and objectives. Therefore, a recipient should assess the appropriateness of such information before making an investment decision based on this information. Information used for the rating has been obtained by TRIS Rating from the company and other sources believed to be reliable. Therefore, TRIS Rating does not guarantee the accuracy, adequacy, or completeness of any such information and will accept no liability for any loss or damage arising from any inaccuracy, inadequacy or incompleteness. Also, TRIS Rating is not responsible for any errors or omissions, the result obtained from, or any actions taken in reliance upon such information. All methodologies used can be found at http://www.trisrating.com/en/rating_information/rating_criteria.html.