Published on 07 Sep 2020.
RAM Ratings has reaffirmed the AA3/Stable/P1 ratings of Pac Lease Berhad’s (the Company) CP/MTN Programme of up to RM1.0 billion (2017/2024). The reaffirmation incorporates our expectation of continued support from Oversea-Chinese Banking Corporation Limited (OCBC Ltd or the Group) via OCBC Bank (Malaysia) Berhad (OCBC Malaysia, rated AAA/Stable/P1), given its strategic fit with the Malaysian operations of the larger Group. While small, Pac Lease’s equipment financing business complements and enhances OCBC Malaysia’s suite of financial services. The ratings also consider the Company’s sound profitability and comfortable gearing level, which balance rising asset quality pressures.
Pac Lease’s customer base mainly comprises SMEs, which are more vulnerable to economic uncertainties given the testing operating environment. The Company has made available three forms of financial relief to ease the debt burden of borrowers. The Company’s asset quality is expected to stay within tolerable limits for its ratings while the financial assistance programme remains in place, but risks might surface after relief measures end. Approved financial relief assistance programme benefited 15% of its customers with exposure representing 33% of gross receivables as at end-June 2020.
As at end-December 2019, Pac Lease’s gross impaired financing (GIF) ratio had climbed to 1.4% (end-December 2018: 1.0%) despite larger write-offs – primarily in the construction and property sector – and continuous recovery efforts. Correspondingly, credit cost was elevated at 0.7% in fiscal 2019 (fiscal 2018: 0.4%) while GIF coverage remained sufficient at 96% as at end-December 2019. In view of the more challenging environment, Pac Lease intends to pre-emptively build up provisions in 2020.
Although net impairment charges on financing doubled to RM12.5 mil in FY Dec 2019, Pac Lease’s pre-tax profit increased 9.5% to RM52.4 mil. The Company’s healthy profitability was backed by the expansion of its financing portfolio (+15% to RM1.9 billion) coupled with a broader net interest margin of 5.2% in FY Dec 2019. Its return on assets for the period was steady at 2.9%. The cumulative 125 bps OPR cut in 7M 2020 augurs well for the Company’s earnings as almost all loans extended by Pac Lease are fixed-rate facilities while borrowings are predominantly short-term floating-rate facilities.
Pac Lease’s gearing ratio of 3.2 times as at end-December 2019 (end-December 2018: 3.0 times) was still comfortable, albeit higher than the 2018 level. While leverage may rise in tandem with business growth, gearing is anticipated to stay below 4 times over the near to medium term, which is well within the Company’s internal prudential limit.
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Ratings on Pac Lease Berhad