Fitch Ratings has assigned Leasing Group JSC a Long-Term Issuer Default Rating (IDR) of ‘B’ and National Long-Term Rating of ‘BB+(kaz)’. The Outlooks are Stable. A full list of rating actions is at the end of this commentary.
KEY RATING DRIVERS
IDRS AND NATIONAL RATINGS
Leasing Group’s IDRs are based on a standalone assessment of the company and do not factor in potential support from the company’s largest shareholder, Samruk-Kazyna Invest (SK Invest), a 100% subsidiary of Kazakhstan’s sovereign wealth fund Samruk-Kazyna (BBB/Stable/F3), which holds a 49% stake in Leasing Group. Fitch understands SK Invest’s stake is a portfolio investment with a probable exit horizon within the next three to five years and not a strategic holding.
Leasing Group’s IDRs reflect the company’s small franchise with limited pricing power, evolving strategy, short track record under new management, and concentrated and unseasoned portfolio. At the same time, the ratings are underpinned by the company’s improving asset quality, sound collateral value and government subsidies, currently strong leverage and profitability, and solid liquidity.
Leasing Group was established in 2005 and has a small domestic franchise with a market share of 1% at end-1H18. Performance was weak from inception until end-2014 when SK Invest purchased a 49% stake and significantly overhauled the business. The new management cleaned up the portfolio, stopped lending and borrowing in foreign currency and expanded the business. However, the strategy is still evolving and the track record of the company’s performance is short and untested through the credit cycle.
Leasing Group has limited pricing power due to its small market share. The company provides finance leases only in local currency, matches maturities of lease contracts with those of borrowed funds, and gives preference to financing standard assets.
The ratio of impaired assets (finance leases, advances and legacy portfolio) had declined to 8.6% at 1H18 from 58% at end-2015. Impaired assets are fully provisioned (by 125%) and mostly relate to legacy loans. However, high asset growth at an average rate of 51% since 2016 is evidence of an unseasoned portfolio. The lease book is highly concentrated by name – the top 10 borrowers accounted for 52% of the book; and industry – the agricultural and construction sectors accounted for 26% and 49% of the book, respectively, at 1H18.
The lease portfolio by assets has a high share of standard and relatively liquid equipment (motor vehicles accounted for 58% at end-2017), which partly mitigates residual value risks in case of lessor defaults. Agricultural equipment (28% of the lease book) and another 9% of leased assets benefit from government subsidies on interest rates and/or purchase prices, which significantly reduces default risk on these contracts.
Profitability is currently strong, with a net interest margin of 22% and pre-impairment operating profit/average total assets at 4.1% in 2017. This is partly supported by low leverage leading to minimal interest expenses. However, performance is very volatile, growing from a low base at a high speed, with
significant exposures to cyclical sectors.
Leasing Group’s absolute capital level was modest (USD12 million equivalent at 1H18), but the leverage metrics were robust with debt-to-tangible equity at 0.2x and equity-to-assets at 80%. The company has not paid dividends. Management intends to maintain strong capital ratios with no dividend payouts to help counterbalance the projected high growth in the medium term.
The company is highly liquid with cash balance exceeding that of total borrowings by 7% at 1H18. All borrowings are in tenge and from state-owned funds. The funding is at favourable conditions, with low-interest rates and long maturities. However, all funding is secured with Leasing Group pledging 45% of the lease book at end-2017. The pledged amount includes undrawn but approved funding.
RATING SENSITIVITIES
IDRS AND NATIONAL RATINGS
Diversification of the loan portfolio away from single name concentrations and cyclical sectors coupled with maintenance of sound performance and greater franchise could trigger an upgrade.
Sharp growth of leverage coupled with further material increase of the lease book concentrations or significant rise of residual value risk (e.g. due to higher share of non-standard leased assets) could lead
to a downgrade.
The rating actions are as follows:
• Long-Term IDR assigned at ‘B’; Outlook Stable
• Short-Term IDR assigned at ‘B’
• Local-Currency Long-Term IDR assigned at ‘B’; Outlook Stable
• Local-Currency Short-Term IDR assigned at ‘B’
• National Rating assigned at ‘BB+(kaz)’; Outlook Stable