MARC Ratings has affirmed its ratings of AA/MARC-1/Stable on Pac Lease Berhad’s Medium-Term Notes (MTN) Programme and Commercial Papers (CP) Programme with a combined limit of RM1.5 billion.

The ratings continue to reflect the company’s long track record, strong market position in the domestic industrial hire purchase (HP) industry, sound asset quality and good profitability. The long-term rating also incorporates a one-notch uplift for potential parental support from Singapore-based Oversea-Chinese Banking Corporation Limited (OCBC). As an indirect, wholly-owned subsidiary of OCBC, MARC Ratings is of the view that Pac Lease will receive operational and financial support, if required. These strengths are moderated by Pac Lease’s modest asset size and its heavy reliance on external borrowings to fund operations.

Loan growth momentum continues in 2023 after a healthy 10.4% increase in 2022, with gross loans growing 7.0% to RM2.4 billion as at end-June 2023, from RM2.2 billion in 2022. Growth was largely driven by lending to the business services sector (+12.5%), which made up about a quarter of Pac Lease’s total loan book. A resilient medical sector, which accounts for more than half of the business services loans, is likely to support the asset quality performance of the sector loans, thereby mitigating risks to Pac Lease’s overall credit profile. Hire purchase financing accounted for 87.3% of Pac Lease's loan portfolio as at end-June 2023, with the remainder mostly comprising term loans largely to small and medium-sized enterprises (SMEs).

Asset quality has remained healthy, despite an uptick in the gross impaired loans (GIL) ratio to 1.36% as at end-June 2023 (2022: 0.89%; average 2018-2022: 1.16%). The higher GIL ratio was mainly related to two impaired loans from the construction and property sector that MARC Ratings understands have been subsequently recovered through collateral (land) liquidation. On excluding these two accounts, and all else remaining equal, the GIL ratio would have improved to around 0.73% as at end-June 2023. Overall, Pac Lease’s asset quality remains good, underpinned by strong credit monitoring and controls, notwithstanding its largely SME clientele base.

Pac Lease’s profitability has been broadly stable, with net interest income of RM60.6 million in 1H2023 (1H2022: RM61.6 million). Net interest margin (NIM) remained healthy although contracting slightly to 5.26% in 1H2023 due to higher funding costs (1H2022: 5.80%). Cost-to-income ratio has also remained low at 30.9% (1H2022: 28.2%), exhibiting steady cost management. Overall, operating earnings remained strong, as reflected in its annualised return on assets (ROA) and return on equity (ROE) of 3.69% and 13.36% (2022: 3.14% and 11.64%). We expect some margin pressure from higher funding costs, but profitability should remain resilient, supported by loan book growth. The company’s NIM is also reasonably wide at over 5%, giving it room to absorb higher funding costs.

Total borrowings increased by about RM190 million to RM1.7 billion as at end-June 2023 mainly from the drawdown of MTN. Pac Lease has an arrangement with Cagamas Berhad which allows the former to sell its HP debt to Cagamas on a recourse basis. The rating agency opines refinancing risk stemming from Pac Lease’s high reliance on short-term funding (80%) is mitigated by its ownership profile. MARC Ratings sees strong bank funding access for Pac Lease, being part of the OCBC Group. Pac Lease’s financial flexibility is further supported by availability of about RM665 million under unutilised credit lines as of end-June 2023 excluding the CP/MTN programme.

The stable rating outlook reflects Pac Lease’s resilient operating performance and the rating agency’s expectation that the company will maintain its asset quality and profitability metrics consistent with its rating over the next 12-18 months.

No rating upgrade is envisaged in the near term. An upgrade would hinge on a sustained loan book growth and a steady record of strong asset quality metrics.

Negative pressure could develop on deterioration in the company’s financial metrics, particularly asset quality, and/or a sharp increase in leverage levels.