Published on 27 Jul 2022.
RAM Ratings has reaffirmed the AA2/Stable rating of ORIX Leasing Malaysia Berhad’s (OLM or the Group) RM500 mil Medium Term Notes (MTN) Programme (2016/2031). The AA2/Stable rating of ORIX Credit Malaysia Sdn Bhd’s (OCM) RM1.5 bil MTN Programme (2021/2051) and P1 rating of its RM500 mil Commercial Papers Programme (2020/2027) have also been reaffirmed.
A wholly owned subsidiary of OLM and highly integrated with the Group, OCM contributed over 70% of the Group’s pre-tax profit in FY Mar 2022. As such, the credit profiles of OLM and OCM are closely aligned.
The reaffirmation of the ratings reflects our expectation of continued ready support from ORIX Corporation (ORIX Corp) – the ultimate parent of the two entities – in view of the Group’s strategic importance to ORIX Corp. Apart from guaranteeing almost all the Group’s bank borrowings and providing credit lines, ORIX Corp exercises strong oversight of the Group’s operations.
The ratings also give credit to OLM’s established franchise in the domestic hire purchase (HP) and leasing industry where it is a leading player. With almost half a century of experience in this space, the Group’s in-depth insight and knowledge of the Malaysian HP and leasing market gives it a strong competitive edge, as does its good relationships with suppliers and clients. OLM ventured into the consumer segment in 2020 with its smart device rental business. Plans are afoot to scale up this offering, given OLM’s improved understanding of customer demand and repayment trends. Prospects for this business as well as the Group’s recently launched motorcycle financing product appear promising, but longer track records will be required to ascertain their performance.
OLM’s gross impaired financing (GIF) ratio retreated to 3.2% as at end-March 2022 (end-September 2021: 5.8%) due to the following factors: (i) impaired accounts reclassified as performing after the execution of restructuring and rescheduling arrangements and Bus & Taxi Hire Purchase Rehabilitation Scheme (BTHPRS) contracts; (ii) the regularisation and recovery of some term loans and HP accounts; and (iii) large GIF write-off mainly attributable to three legacy impaired accounts. We note that this ratio includes term loans under indulgence which continue to be classified as impaired based on its original terms despite indulgence granted. About 9.7% of the Group’s receivables were under relief as at end-March 2022, of which about 75% relate to the government-led BTHPRS for bus operators. Potential credit losses are mitigated by a 50% guarantee under the scheme as well as the Group’s prudent underwriting and stringent monitoring and collection procedures.
OLM has a solid balance sheet with one of the lowest gearing levels among its RAM-rated leasing peers, standing at 1.1 times as at end-March 2022. This metric will likely increase as lending resumes following the reopening of the economy and the rollout of the Group’s new products. OLM’s cash balances and funding lines from its parent afforded the Group 3.3 times coverage of its short-term debt as at the same date.
Pre-tax profit rebounded to RM107 mil in FY Mar 2022 (FY Mar 2021: RM77 mil) on account of a net impairment writeback of RM5.2 mil during the year (FY Mar 2021: impairment charge of RM23 mil). OLM’s net interest margin (NIM) grew to 5.6% (fiscal 2021: 5.2%) as its receivables are largely priced at fixed rates and funding costs edged down following interest rate cuts in 2020. Recent increases in interest rates may pressure NIMs in fiscal 2023 but over the longer term, a shift in the Group’s product mix to include more higher-yielding consumer financing and term loans could lend some upside to overall profitability.
Lee Yee Von
(603) 3385 2503
Wong Yin Ching, CFA
(603) 3385 2555
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