TRIS Rating Co., Ltd. has affirmed the company rating of Asia Sermkij Leasing PLC (ASK) at “BBB+” with “stable” outlook. The rating reflects ASK’s experienced management team in the auto hire purchase business and the ability to maintain market position despite the slowdown in auto hire purchase market, as a consequence of the downturn of Thailand’s automobile industry. In addition, a strong position in selected niche markets for commercial vehicles, supports from the major shareholders, efficient risk management systems, and long-term relationships with dealers also support the rating. However, these strengths are partially offset by the nature of its auto loan portfolio, which is considered more volatile to adverse changes in economic factors, despite higher returns. Intensified competition during uncertain economic conditions has constrained the company’s profitability and portfolio expansion. These factors also impacted ASK’s asset quality as reflected in the weakening non-performing loans (NPL) ratio. In addition, a tightened funding flexibility from major source of funds, due to revised regulations, has partly constrained the company’s financial strengths.
The “stable” outlook is based on TRIS Rating’s expectation that ASK will be able to maintain its market positions in the niche markets of the commercial vehicles. ASK’s experienced management team plus efficient risk management and operating systems will help the company control asset quality. Support from major shareholders is expected to continue. The outlook also takes into consideration that ASK will be able to manage to have sufficient funding flexibility, both for relieving liquidity constraints and supporting business expansion.
TRIS Rating reported that ASK was established in 1984 by the Bangkok Bank Group to provide retail auto financing loans under hire purchase contracts. In 1992, Chailease Finance Ltd., the largest leasing company in Taiwan and part of the Koo Group, joined with the Bangkok Bank Group to establish Bangkok Grand Pacific Lease PLC (BGPL), which subsequently purchased all of ASK’s shares from the Bangkok Bank Group. BGPL provides hire purchase and leasing loans to corporate clients, emphasizing machinery and equipment (M&E) loans, loans for commercial vehicles, as well as factoring loans. The shareholding was restructured in 2004, before the company was listed on the Stock Exchange of Thailand (SET) in 2005. BGPL, which was previously the parent company of ASK, became a wholly-owned subsidiary of ASK. Currently, the Bangkok Bank Group holds 13.5% in ASK, with the Koo Group from Taiwan, under Chailease Finance Ltd., A.K. Enterprise (Thailand) Co., Ltd., and Mr. John Lee Koo, is the largest shareholder (72.9% combined ownership).
TRIS Rating said, although domestic automobile demand shrank by approximately 30% in the first half of 2009, ASK has been able to maintain its retail auto loan business, which was the largest portion of consolidated loan portfolio. At the end of June 2009, ASK had Bt11,676 million in consolidated outstanding loans, down slightly from Bt11,820 million in 2008, mainly due to slowdowns in the leasing and factoring businesses of BGPL. Of the consolidated loan portfolio, 82.1% was retail auto financing loans held by ASK, up from 77.1% and 79.2% in 2007 and 2008, respectively, while the proportion of BGPL’s loan portfolio decreased to 17.7% of its consolidated loans, down from 22.4% and 20.5% in 2007 and 2008, respectively.
ASK’s overall customer concentration risk is considered low, due to the nature of retail auto financing loans. In addition, ASK’s diversified portfolio mix of retail auto hire purchase loans helps reduce product concentration risk. At the end of June 2009, ASK’s outstanding retail auto hire purchase loans comprised passenger cars and pick-up trucks (42.9%), vans (15.1%), big trucks (26.4%), taxis (13.1%), buses (1.1%) and refinancing loans (1.4%). Although loans for commercial vehicles, such as big trucks, vans and taxis, have generated higher returns, the composition of ASK’s retail portfolio carried higher credit risks than other major auto financing companies which have concentrated on passenger cars and pick-up trucks. This was because the asset liquidation for repossessed passenger cars and pick-up trucks were less of a concern than for ASK’s targeted vehicle types. To mitigate the higher risks, therefore, the company implemented a segmentation strategy that focused on the less risky sub-segments of each asset type and target customer group.
Despite a riskier loan portfolio, the ratio of NPL (loans with more than three installments past due) to average loans is quite low, when compared with other auto hire purchase companies. The experienced management team, efficient risk management system and conservative underwriting policy are the factors that could help the company keep asset quality at an acceptable level; however, the NPL ratio did rise from 0.99% in 2005 to 1.88% at the end of June 2009. In addition, intensified competition in the auto hire purchase industry has pressured the profitability of ASK and other major operators. The ratio of return on average assets was at 1.57% in 2008, lower than 1.64% in 2007 due partly to a Bt22 million loss from the factoring business. This level is considered low in a cross-industry comparison.
In terms of sources of fund, TRIS Rating said that ASK has been benefited by being an affiliate of the Bangkok Bank PLC (BBL). However, this benefit has been constrained by the revised regulations regarding lending limits to a related entity of financial institutions, released on 3 August 2008 by the Bank of Thailand (BOT). The regulation limits the amount of debt financing from a commercial bank to any related company. Debt financing provided to related entities is capped at not over 5% of a commercial bank’s capital funds or 25% of the borrower’s liabilities, whichever is lower. The regulations provide a five-year grace period, but no new credit facility can be offered if that makes the total credit amount exceed the regulatory limits.
At the end of June 2009, borrowings from BBL accounted for 34.62% of ASK’s total liabilities. The new regulations limit ASK’s financial flexibility and the ability to enjoy a secure source of funds from BBL. ASK has been trying to diversify its funding sources to other financial institutions and the capital markets, in part by leveraging the creditworthiness of its foreign parent company, and by keeping the available credit line from BBL as a financial cushion to mitigate its liquidity risk. The funding structure and refinancing plan for Bt3,000 million term loan, which will mature in 2010, will be closely monitored, said TRIS Rating. -- End
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