CRESCENT LEASING CORPORATION LIMITED () Ratings (April 1998) Short Term Long Term Crescent Leasing Corporation Ltd. New A2 Previous A2 New BBB (Triple B) Previous BBB- (Triple B minus) Total Assets Rs. mln Total Equity Rs. mln Profit After Tax Rs. mln ROA** (%) ROE** (%) Equity/Assets (%) 30/06/97 710.56 255.20 36.41 6.15 14.67 35.92 30/06/96 474.08 241.30 32.30 8.65 13.66 50.90 30/06/95 272.76 231.50 11.37* 10.75 14.39 84.87 Analyst: Muhammad Shabbir * six months results **ROE & ROA for 1995 annualised. Background: Incorporated in April 1987, commenced business operations in 1989. It is listed on all stock exchanges. The company is affiliated with the Crescent Group which holds the majority stake in the equity of the company. The Crescent Group has diversified business interests including companies in textiles, sugar, steel, and financial sectors. Commonwealth Development Corporation (CDC), a multi lateral lending institution, holds 20% stake in the company. The Chief Executive of has extensive experience of the financial sector in Pakistan. The company ranks 9th among listed leasing companies in terms of total assets at end-june, 1997, and has a market share of 2.1% on the basis of net investment in leases (1996:1.9%). s Board of director comprises eight members including five representatives of the Crescent Group companies. Assessment: With the availability of adequate long term funding, the company s lease portfolio continued its growth in 1997. s performance indicators show slight improvement over the last year. It has been able to maintain its spread as the meagre increase in cost of funds was off set by a corresponding increase in return on leases. Improvement in the cost to revenue ratio and increase in gearing resulted in a modest increase in the return on average equity. The company s performance in terms of ROE has become better than the sector average during 1997 compared to below average profitability in the preceding two years. On the basis of company s performance during the six months ended December 31, 1997, its profitability for the coming year is expected to be in line with its current results. At end-june 1997, s lease portfolio has a moderate credit concentration in terms of individual exposures. However, sectoral diversification of the portfolio remained adequate. While the asset portfolios of the companies operating in the leasing sector has shown deterioration during 1997, there has been only a modest increase in the risk profile of the s lease portfolio. The impaired portfolio increased owing to the rescheduling of a cement sector exposure which is common to the non-performing portfolios of most financial institutions. The possibility of rescheduling of the lease to the cement company did exist at the time of our previous rating and as such was covered in our assessment of credit risk. Given the continued oversupply situation in the cement sector, repayment of lease obligations by the company in a timely manner remains uncertain. At end June 1997, s impaired portfolio, as a percentage of total lease portfolio, was 9.5% as against 6.8% in 1996. The majority of rescheduled leases which comprise 8.6% of the total lease portfolio are performing satisfactorily. Excluding leases with satisfactory repayment behaviour, the ratio of impaired leases to total leases comes to around 5.1%. Given the annual profits and equity base of the company, the cushion to absorb potential lease losses remains adequate. has a low exposure to the stock market with a modest investment in the shares of group companies. The company has not been exposed to the maturity mismatch risk as lease investments have mainly been financed through equity and long term funds. There has been significant increase in the long term funding of the company over the last two years. While long term loan from a multi lateral lending institution was fully drawn during 1997, did not face any funding constraints. The company also raised a modest amount through issuance of COIs. Subsequent to June 1997, the company has obtained long term financing from a local financial institution, and is also in the process of getting a long term foreign currency loan from the IFC. Despite the increase in gearing, continues to have above average liquidity and current ratios. Given the company s access to adequate funding and the strength of its management, prospects for growth and profitability are likely to remain above average. PACRA upgrades its entity rating for the company from BBB- to BBB.
PACRA ENTITY RATING CRESCENT LEASING CORPORATION LIMITED 1. PROFILE 1.1 Crescent Leasing Corporation Limited () was incorporated in April 1987 as Credit & Leasing Corporation Limited and commenced commercial operations in August, 1989. After Crescent Investment Bank Ltd. and National Development Finance Corporation, a public sector DFI, joined as co-sponsors, the company went public in 1992 and listed on all stock exchanges of the country. In 1993, the company adopted its current name to reflect association with the Crescent Group., in terms of total assets as at June 30, 1997, ranks 9th (1996: 9th), and has a market share of 2.1% on the basis of net investment in leases compared to 1.9% in 1996. During 1995, Commonwealth Development Corporation (CDC), a multi lateral lending institution, acquired the single largest stake in the equity of the company. There has been no major change in the equity structure of the company during 1997. s share holding at end-june 1997 is given below: Investor Shares Held (%) Crescent Investment Bank Ltd. 11.78 Shakar Ganj Mills Ltd. 15.27 First Crescent Modaraba 11.31 National Development Finance Corporation 5.84 NIT 8.32 Commonwealth Development Corporation 20.00 Others 27.48 Source: company information. 1.2 is a part of the Crescent Group, one of the leading industrial and business groups in Pakistan. The Group has diversified interests ranging from textile, sugar, steel to leasing and investment banking. The leasing sector companies include, besides, Pakistan Industrial Leasing Corporation Ltd. (PILCORP), one of the large leasing companies having assets of around PR.4 billion. The Board of Directors of comprises eight directors of which three are the nominees of CDC, NDFC and NIT while the rest represent Crescent Group companies. There is a change in management during the year to end June 1997 as the new Chief Executive took on the responsibilities. However, there is a sense of continuity as the new incumbent has earlier served the company in the same capacity, and brings with him a vast experience of the financial sector in Pakistan. He is assisted by two chief managers, both Chartered Accountants. has its head office in Karachi and it also undertakes branch activities from Lahore. The operations in the head office are divided into two departments: operations and finance & accounts - both headed by chief mangers who report to the CEO. The credit and administration functions of the organisation are controlled by the operations department. An internal auditor also reports directly to the CE. 2. OPERATING ENVIRONMENT 2.1 The recessionary economic conditions of 1995-96 continued in 1996-97 with the fall in GDP growth from 4.6% to 3.1%. There was a nominal growth in the agricultural sector, negative growth, for the first time, in large scale manufacturing but mitigated by continuing December 17, 2012 Page 2 of 6
high growth (8%) in the small scale manufacturing. The number of companies offering shares to the public remained low. Credit markets were also extremely tight, resulting in high borrowing rates, further aggravating the decline in industrial investment. 2.2 During the first two quarters of 1997-98, large scale manufacturing has registered a nominal growth of 0.4% indicating continuing recessionary conditions. The local stock market remained more or less stagnant, showing a few bursts of strength, but currently hovering around 1600 points which represents modest improvement from the lowest level of under 1400 in 4Q 96. Meanwhile, data for the first six months of 1997-98 suggests that revenue and growth targets for the year would be difficult to achieve. This, in turn, exposes the Government to the risk of delay in the release of successive tranches under the US$1.6 billion facility by IMF even though the first two tranches have been released on time. The foreign exchange reserves remain vulnerable to export earnings. Despite the 8.7% devaluation in the 3Q 97, there has not been any significant improvement in exports, while in the face of steep devaluation experienced by the East Asian economies, the Pakistani rupee has become relatively over-valued which could require further exchange rate adjustment. This has created uncertainty in the financial sector and reduced the prospects of direct foreign investment in the industrial sector. These difficulties notwithstanding, the government seems committed to reducing the cost and increasing the availability of credit and has taken a number of steps in that direction. These include the abolition of 1% excise duty on loans and reduction of the SLR for commercial banks and NBFIs. However, in view of continued recession, financial institutions are cautious and have significantly reduced their commercial lending operations. This is also due to the fact that the financial intermediaries are finding it increasingly difficult to identify creditworthy clients. 2.3 With the newly imposed requirement by A of increasing the minimum paid-up capital of leasing companies to Rs.200 million by end 1999, the leasing sector is expected to look for new equity partners due to the fact that it would be difficult to mobilise fresh equity from the currently depressed stock market. It is also expected that leasing companies will now look for small and medium business segments both for purposes of risk diversification and maintaining spreads. While on the one hand, this could increase the administrative cost for individual leasing companies, on the other, increasing competition in this segment is likely to reduce over-all spreads. Another factor which could accentuate the trend towards small and medium enterprises, is the reduced incentive for large corporates to use the leasing option as compared to loan financing. This is due to accelerated depreciation allowances as much as 90% in the first year on plant and machinery under the recently announced investment policy. As a result, the lease option would become less attractive for potential clients, particularly in the large scale industry from the tax benefit angle. At the same time, however, this accelerates the tax deferral for the leasing company. 2.4 Currently, there are 32 leasing companies and 22 leasing Modarabas operating locally. The market share of leasing vis-à-vis bank loans has risen significantly during the last three years from 2.6% to 4.7% 1. The leasing market is dominated by the six 1 large leasing 1 Source: Leasing companies annual report and SBP Statistical Bulletin, November 1997 1 The names of these companies are Orix Leasing, NDLC, PILCORP, Atlas Lease, Askari Leasing and Saudi Pak Leasing. 3 Source: Annual reports of leasing companies December 17, 2012 Page 3 of 6
companies whose combined market share during the last three years has remained approximately 70%. The CAGR in the lease financing of the Pakistani leasing sector during 1995-97 has been 30% 3 which is more than the 20-25% growth required for deferring tax liability. However, given the current slowdown in industrial expansion, past growth rates are not likely to be sustainable in the short run. Meanwhile, in view of deteriorating asset quality of the leasing sector, and intensity of competition, profit margins of the sector for 1998 are not expected to show improvement over 1997. 2.5 Performance of Crescent Leasing 2.5.1 During 1996 and 1997, s leased assets grew by 96% and 34% respectively, reflecting significant increase in its funding base. During 1997, has shown considerable growth in revenues generated from the core activity of leasing in line with the growth in its lease portfolio. While the company has maintained its spread despite upward pressure on its cost of funds, increase in gearing and operating efficiency have resulted in improved profitability. s cost to revenue ratio exhibited a decline owing to increase in its revenues. The company s performance for 1997, in terms of ROE, is better than the sector average. s profitability on the basis of the results for the six months ended December 31, 1997, is expected to remain in line with its current results. The profitability of in comparison with the sector average is given below: Sector Average 1997 1996 1995* 1997 1996 1995 Return on average equity 14.67 13.66 14.39 13.8 14.5 15.4 Return on average assets 6.15 8.65 10.75 4.9 3.6 3.5 Cost to revenue 11.78 15.51 22.03 17.7 16.6 17.5 All figures are Percentages. * Results for six months ended June 30, 1995 annualised. Sector averages are based on a representative sample comprising 21 leasing companies. Source: Published Annual Reports of companies. 2.5.2 Spreads. In line with the general trend, faced declining spreads during 1995-96. As s funding was dominated by foreign currency borrowing, the cost of foreign exchange risk cover has been the major reason for the increase in cost of funds. However, during 1997, the modest rise in cost of funds was mitigated by the increase in rate of return on leases. The spreads generated by are shown below: 3. RISK June 30 1997 1996 1995 Return on advances ( % ) 21.92 21.65 22.00 Cost of funds ( % ) 19.01 18.74 17.63 Spread ( % ) 2.91 2.91 4.37 Source : Company information. 3.1 Risk Management. makes detailed evaluation of credit proposals and generally finances entities which have successful track record of three years. The company s risk evaluation guidelines cover the managerial, business and financial soundness of lessees. The company has a multi-tier credit approval system. The Credit Committee comprising CEO and December 17, 2012 Page 4 of 6
two chief managers could approve leases of upto PR1 mln. The Executive Committee consisting of CEO and two directors has the sanctioning limit of PR10 mln. Leases exceeding this limit are approved by the Board. The operations department undertakes regular monitoring of leases after disbursement and recovery of lease rentals. Overall, the management appears to be adequately equipped to identify and manage risk of the asset portfolio. 3.2 Credit Risk. has so far financed mainly small to medium ticket clients. With twenty largest leases constituting about 48% of the lease portfolio, the company appears to have a moderate degree of credit concentration in terms of individual exposures. The risk is somewhat mitigated by the business standing of its large clients which include government owned/controlled gas utilities. However, s lease portfolio has adequate sectoral diversification as shown below: As at June 30 (%) 1997 1996 Textile 13 11 Cement 10 17 Paper & Board 5 8 Energy, Oil & Gas 17 11 Steel, Engineering & Automobiles 5 9 Chemical & Fertilisers 6 4 Miscellaneous* 44 40 Total lending (PR mln) 512 381 Source : company annual reports * Miscellaneous includes various sectors none of which constitutes more than 5% of total lending. 3.2.2 Loan Loss Provisions & Impaired Portfolio. At end June 1997, s impaired lending constituted 9.5% of its total net investment in leases compared to 6.8% in 1996. While rescheduled leases comprised about 8.6% of the lease portfolio, lease facilities against which prudential provision was made account for 0.9% of the portfolio. The increase in the impaired portfolio is due to the rescheduling of s exposure to a cement sector company which has also affected the loan portfolios of many other financial institutions. The prospects of rescheduling of this exposure existed at the time of our initial rating of the company and, as such, duly covered in the evaluation of the risk profile. Given the continued glut in the cement sector, it remains to be seen whether the company would be able to honour its repayment obligations in a timely manner. Excluding rescheduled leases with satisfactory postrescheduling repayments, the proportion of impaired portfolio comes to around 5.1% of the total portfolio. The company makes a general provision (contingency reserve) of 2.% of net investment in leases for potential lease losses in addition to the provision required under the prudential regulations of SBP. s existing provisions cover around 42% of the impaired leases with unsatisfactory repayment behaviour. Given the low level of the impaired portfolio, the cushion provided by provisions against potential lease losses is expected to remain adequate. 3.3 Market Risk and Asset/Liability Management. has limited exposure to the stock market. It invested a modest amount in shares of its group companies during FYE1997. The shares were acquired at par value and currently there has been a slight diminution in the value of quoted shares. has not been exposed to the maturity mismatch till end-june 1997 owing to the availability of adequate long term funds. December 17, 2012 Page 5 of 6
4. FUNDING & CAPITAL 4.1 s operations till 1995 have mainly been financed through equity. Two successful right issues in 1994 and 1995 and acquisition of 20% stake by CDC resulted in substantial increase in equity. The foreign currency denominated funds from a multi lateral lending institution during 1995-97 have improved s funding base. Given the strength of its sponsors, appears well positioned to obtain the funding required for future growth. The company has obtained a long term demand finance from a local financial institution subsequent to June 1997, and is also in the process of obtaining a US$5 mln financing from the IFC. Given the s success in acquiring long term funds, it is not likely to face any significant funding constraints in future. 4.2 Under the prudential regulations, leasing companies can operate at a gearing of ten times of equity. Historically, has had a low gearing. Although, the gearing has increased during 1997, it has remained amongst the lowest in the sector. The company has maintained above average capital adequacy which provides ample capacity to substantially increase its gearing in future years to fund its operations. The company has had high liquid assets to short term debt and current ratios owing to the low proportion of short term debt in its funding portfolio. However, with the increase in s gearing these are expected to come in line with the sector average. A comparison of capital structure and current ratios of the company is provided in the table below: Sector Average 1997 1996 1995 1997 1996 1995 Equity to Total Assets (%) 35.9 50.9 84.9 36.4 27.8 29.3 Total Debt/Equity (%) 131.0 65.4 7.5 209.7 259.2 229.0 Current Ratio (X) 2.1 2.8 6.7 1.3 1.2 1.5 Source: Published Annual Reports of companies. December 17, 2012 Page 6 of 6