Bangkok--16 Oct--TRIS Rating TRIS Rating Co., Ltd. has affirmed the company rating of Ayudhya Development Leasing Co., Ltd. (ADLC) at “BBB+” with “stable” outlook. The rating reflects ADLC’s strong market position in the industrial machinery and equipment leasing industry, a capable and experienced management team that has continuously been able to expand the company’s portfolio, and its ability to maintain low operating costs. The rating also takes into consideration the business and financial support from its major shareholder, Bank of Ayudhya PLC (BAY). However, these strengths are partially offset by customer concentration risk and the higher risk profiles of its target customers than those of commercial banks, and an unfavorable economic environment in the short term. The “stable” outlook reflects TRIS Rating’s expectation that ADLC’s experienced management team will be able to maintain both its leading market position and its low operating costs. The outlook also takes into account the expectation that the capable management team will be able to control its asset quality and prevent it from becoming weaker than TRIS Rating’s expectation, while also strengthening its leasing structure and credit policies to mitigate against losses from NPLs. Moreover, the rating outlook is also based on the assumption that BAY will continue to provide both business and financial support to ADLC. TRIS Rating reported that ADLC’s loan portfolio (including net operating lease assets) increased by 17.8% to Bt4,819 million in 2006 from Bt4,092 million in 2005. ADLC reported net income of Bt82 million in 2006, down from Bt105 million in 2005, partly due to an increase in provisions for loan losses from Bt31 million in 2005 to Bt53 million in 2006. However, net interest and dividend income (after depreciation for operating lease assets) improved to Bt183 million in 2006, from Bt162 million and Bt113 million in 2005 and 2004, respectively. The improvement was mainly driven by income from new performing accounts originated since 2004, which have been quite profitable. Leasing industry continues to have low penetration rate because the leasing industry in Thailand has remained in a nascent stage, especially when compared with advanced economies such as the US, Germany and Japan. The result has been that ADLC has experienced customer concentration risk though the company has benefited in terms of operating cost efficiency. During 1999-2006, the ratio of operating expenses to total income was approximately 15%, less than the 20%-30% recorded by its peers. ADLC’s non-performing loans (NPL) to average loan ratio weakened in 2006, after improving in 2005 due to huge write-offs. The ratio of NPLs (net from cash deposits) to average loans (net from cash deposits) increased from 4.2% in 2005 to 5.4% in 2006, and to 7.5% at the end of June 2007. Moreover, loans classified as special mention (31-90 days delinquent loans), rose from 2.8% of total loans in 2006 to 5.8% as of June 2007. The weakening of ADLC’s asset quality was mainly due to the slowdown of the Thai economy. To mitigate customer credit risk, ADLC has implemented and structured conservative credit policies, including deposit requirements, securing buy-back guarantees from suppliers, and assigning payments from lessees’ customers. However, the company’s target customers are small and medium enterprises (SMEs), which are vulnerable to the changing economic and business environment, which exposes ADLC to credit quality deterioration during an economic slowdown. TRIS Rating will monitor and reassess ADLC’s asset quality closely. ADLC is one of the market leaders in the leasing industry with a concentration on industrial machinery and equipment leases. The company was established in 1991 as a joint venture between three financial institutions: BAY, International Finance Corporation (IFC), and Korea Development Financial Corporation (KDFC), formerly known as Korea Development Leasing Corporation (KDLC), the largest leasing company in South Korea. As BAY has implemented the universal banking policy and planed to use ADLC as a strategic entity to provide machinery and equipment leasing services, in 2004, BAY injected Bt145.4 million in new capital in ADLC, both by exercising its own rights and taking up for the unexercised portions of other shareholders. From 2004-2007, BAY continuously purchased ADLC shares from other shareholders and at the end of April 2007, BAY’s shareholdings in ADLC increased to 90% after it purchased a 3.3% stake from a foreign shareholder. As the leasing business requires specific knowledge and expertise that are different from normal banking operation, the success of the business synergies with BAY has yet to be proved, said TRIS Rating.