TRIS Rating affirms the company rating on BSL Leasing Co., Ltd. (BSL) at “BBB” with a “stable” outlook. The rating reflects the company’s strong capital base, low leverage, and financial support from its major shareholders. However, these supporting factors are offset by BSL’s deteriorating asset quality, high credit concentration, and an asset-liability mismatch. In addition, intense competition limits the company’s profitability.
KEY RATING CONSIDERATIONS
Solid capital base
TRIS Rating believes that BSL’s current capital will remain sufficiently robust to support the company’s business plans over the next three years. The strong capital base is supported by a low dividend payout ratio, conservative loan growth, and consistent profit generation.
BSL’s debt to equity ratio, a measure of capital strength, has stayed moderate and continually declined over the past five years. It is the lowest among its peers in TRIS Rating’s database. The ratio fell to 2.8 times, from 3.2 times as of September 2019 and December 2018, compared with peers’ average of about 10 times.
Shareholders’ funding support ensures sufficient liquidity
We believe that the financial support from the major shareholders as well as a range of funding sources from other financial institutions will let BSL maintain its operations and meet its debt repayment obligations.
As of September 2019, BSL had available credit lines of Bt1.18 billion and Bt2.11 billion from Bangkok Bank PLC (BBL) and Sumitomo Mitsui Banking Corporation (SMBC), respectively. Nevertheless, BSL does not rely heavily on borrowings from BBL as these are mostly used as back-up funding for liquidity management. In September 2019, the used credit lines from BBL amounted to only 2.0% of BSL’s total liabilities.
Competition limits profitability
The intense competition has put limits on BSL’s asset growth and loan yield. The yield has continued to trend downwards over the past 3 years, from 6.8% to 6.4%. Despite the aforementioned, BSL’s yield is still comparatively higher than peers; this higher yield limits BSL’s competitive position in the market.
TRIS Rating believes that the level of competition in the equipment leasing segment will remain high. This is because many leasing operators tend to have funding support from their parent banks and Japanese finance companies. Therefore, these operators are able to absorb lower yields due to lower funding costs pass through from their parent. Thus, the industry will continue to face yield pressure for the foreseeable future.
Asset quality deteriorates further
BSL’s asset quality remains our main concern. High customer concentration is the key risk factor causing the spike in non-performing loans (NPLs). Since 2016, only one customer group has led to a surge in NPL ratio to 8.7% in 2016. Nonetheless, BSL already made full provisions for this account in 2017.
At the end of 2019, BSL’s asset quality deteriorated further, with the NPL ratio rising to 11%. Excluding the legacy NPLs in 2016, the NPL ratio was at 4.1%, a strong increase from 0.69% at the end of 2018, compared on the same basis. Going forward, we believe BSL’s asset quality will remain weak as long as the NPL accounts remain unresolved as the company has no policy to write off or dispose of NPLs. As of December 2019, BSL’s top-10 clients accounted for 27% of the loan portfolio. We view that the weakening economy could lead to higher NPLs, if not well managed.
Asset-liability mismatch
BSL has a maturity mismatch in its asset-liability structure. The company’s average loan duration is between 42 to 48 months, but BSL relies on short-term borrowing to keep its funding cost low. Nevertheless, we are not overly concerned with the asset-liability mismatch as we believe BSL has sufficient funding support in the form of credit lines from major shareholders to finance the short-term liquidity gap, if required.
BASECASE ASSUMPTIONS
TRIS Rating’s base-case assumptions for the period 2020-2022 are:
• New loans in hire-purchase and financial lease will grow by 5%-10% per year
• New loans in operating lease will remain stable
• Debt to equity ratio will remain below 3 times
• Overall yield will remain between 6%-7%%
• Credit cost will be approximately 3% in 2020 (to support TFRS9) and below 1%, thereafter
• Operating expenses to total income ratio remains between 42%-44%
RATING OUTLOOK
The “stable” outlook is based on TRIS Rating’s expectation that BSL will continue to receive financial support from its major shareholders and maintain its diversified funding sources. The outlook also includes the expectation that the capital base will remain strong enough to cushion against any deterioration in asset quality, and BSL’s financial performance will be in line with TRIS Rating’s expectations.
RATING SENSITIVITIES
The rating and/or outlook could be revised downward if there is a significant deterioration in the company’s capital base, leverage, or risk position. A downgrade could happen if, for instance, BSL’s debt to equity ratio rises substantially or asset quality deteriorates significantly.
The rating and/or outlook could be revised upward provided that the company’s market position and/or financial performance improve significantly. We could also upgrade the rating should there be any changes in BSL’s shareholder structure. For example, if BSL becomes part of BBL’s financial conglomerate under the consolidated supervision platform of the Bank of Thailand (BOT), BSL’s rating could be enhanced by group support.
COMPANY OVERVIEW
BSL was established in 1985 as Bangkok Commercial Leasing Co., Ltd. through a 50:50 joint venture between BBL and SMBC, a Japanese bank, and related companies. BSL was established to provide industrial equipment financing services and vehicle financing services under lease and hire purchase contracts. BSL entered the factoring business in 2004. Currently, BSL’s major shareholders are BBL, holding a 35.9% stake, the SMBC Group (40%), and JA Mitsui Leasing, Ltd. (10%). Both BBL and the SMBC Group provide supports to BSL in terms of credit facilities and business referrals. The BOT has given BBL formal approval to maintain its shareholding stake (35.9%) in BSL. Despite the approval, BSL and BBL must still comply with a regulation that limits the amount of money a commercial bank may lend to a related company.
As of September 2018, the largest portion (39%) of BSL’s loan portfolio comprised hire purchase. Financial lease loans comprised 27% of the portfolio, while operating leases, factoring, and other loans were 11%, 10%, and 14%, respectively. In terms of assets for lease, industrial equipment constituted 32% of the total, followed by automobiles at 22% and others at 46%.
RELATED CRITERIA
- Nonbank Lending Company, 7 May 2018
BSL Leasing Co., Ltd. (BSL)
Company Rating: BBB
Rating Outlook: Stable