TRIS Rating has affirmed the company rating of Mida Leasing PLC (ML) at “BBB-”. At the same time, TRIS Rating has removed ML’s “developing” CreditAlert and has assigned a “developing” outlook to the rating.
The rating reflects the company’s status as an affiliate of Mida Asset PLC (MIDA), a hire-purchase lender which finances a number of brand names of electrical home appliances and a property developer. The rating takes into consideration ML’s proven track record in auto financing and its steady ability to generate earnings. The rating also reflects ML’s diversified branch network in many regions nationwide and the strong relationships with its business partners. However, these strengths are mitigated by three factors. ML faces intense competition in the auto financing segment. In addition, it has limited financial flexibility and a relatively weak market position, in terms of outstanding loans, compared with major competitors.
The “developing” outlook for ML’s rating reflects the uncertain impacts on the company’s business direction and major shareholders’ support after MIDA’s shareholders meeting on 23 April 2015 approved the divestment in ML. The divestment process is expected to take longer time than TRIS Rating initially expected. The “developing” outlook is based on the recent announcement that MIDA will sell its entire stake in ML, leading ML to face business transition risks due to uncertain impacts on its business direction and major shareholders’ support. A rating confirmation would be likely if ML can maintain its market position and financial performance with strong capital base. However, the credit profile of new major shareholder will have an influence on ML’s rating. The rating could be revised downward should there be any factors which would cause a significant deterioration in ML’s asset quality and its financial profile.
ML was established in 2000 with registered capital of Bt90 million. Currently, ML’s registered and paid-up capital is Bt484 million. On 6 March 2015, MIDA announced to sell its entire stake in ML, or 46.98% of the registered and paid-up capital. MIDA set a condition that the selling price must not be lower than Bt2.20 per share. During December 2014 and January 2015, MIDA had already reduced its investment in ML from 60% to 46.98% by gradually selling 13.02% of ML’s shares it owned. MIDA is divesting its shares of ML to raise funds for its core business: real estate investment.
Since established, ML has focused on financing the purchase of used automobiles through hire purchase loans. The company’s primary target market at the present time is the financing of used automobiles that are over five years old. The size of ML’s hire-purchase loan portfolio has held steady at around Bt2,500 million since 2005. In 2014, the amount of outstanding loans was Bt2,503 million, comprising 99% hire purchase loans and 1% floor plan loans. Outstanding loan portfolio increased slightly to Bt2,511 million at the end of March 2015.
The ratio of non-performing loans (NPLs) to total hire purchase loans oscillated from 3% in 2010 to 3.8% in 2011, 2.3% in 2012, and to 3.6% in 2013. As a result of the economic slowdown in 2013, the quality of ML’s hire purchase loan portfolio deteriorated from the level in 2012. The NPL ratio continued to deteriorate in 2014, climbing to 4.3% and 4.6% at the end of March and June 2014, respectively. Bad debts written off during the second half of 2014 helped reduce the NPL ratio to 3.2% at the end of 2014. However, the NPL ratio rebounded to 4.4% at the end of March 2015. ML now places a greater emphasis on the collection function and has adjusted its lending policy and underwriting criteria to improve its loan quality. TRIS Rating will monitor the effectiveness of these efforts.
In 2011 and 2012, the government unveiled a tax rebate for first-time buyers of new cars. This government program hurt ML and other lessors because the market prices of used automobiles plunged. Consumers bought brand-new automobiles instead. ML’s financial performance declined in 2013. Net income was Bt112 million in 2013, a 16% drop from earnings of Bt134 million in 2012. In 2014, ML’s profitability continued to drop according to a decrease in net income to Bt87 million, a 22% drop from 2013. The decline was due in part to a 14% rise in operating expenses which included the losses on the sales of repossessed assets. Operating expenses jumped to Bt250 million in 2014, from Bt219 million in 2013. ML had higher losses on the sales of repossessed assets because used car prices fell. In addition, the company set aside Bt52 million as a provision for possible loan losses in 2014. The provision in 2014 almost doubled the Bt37 million set aside in 2013. In 2014, however, the ratio of the allowance for hire purchase loan losses to total hire purchase loans slightly dropped to 2.3%, from 2.6% in 2013. The return on average assets (ROAA) dropped to 3.3% in 2014 from 4.2% in 2013. ML reported Bt24 million of net profit for the first quarter of 2015, a 12% up from the level in the same period of 2014.
Since 2010, ML’s equity capital base has gradually increased. The ratio of shareholders’ equity to total assets improved steadily, climbing to 54.6% as of December 2014 from 38.6% in 2010. Steady profits brought a steady increase in shareholders’ equity. ML’s capital base is considered strong, but it may not be sufficient for the company to expand its loan portfolio without additional borrowings. A substantial expansion of its loan portfolio will be a major challenge for ML. ML has a relatively weak market position and no secure funding sources, unlike its major competitors. However, TRIS Rating expects the company to maintain its relatively strong capital base. A strong capital base serves as a cushion to absorb the risk from customers with higher credit risk. These higher-risk customers are more vulnerable to adverse changes in the economy. Furthermore, should ML have new major shareholders, it may face major changes in organization and capital structures.
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