CI Ratings has upgraded Al Manar Financing and Leasing’s Long-Term Corporate Rating to ‘BB’ from ‘BB-’. The Short-Term Rating is maintained at ‘B’.
The upgrade is largely underpinned by Al Manar Financing and Leasing’s sound financial metrics, including the improving quality of the financing receivable book, good debt service ability and sound profitability.
In light of the upgrade the Outlook for the ratings is revised to ‘Stable’ from ‘Positive’.
Al Manar (profile) is a relatively small finance and leasing company in Kuwait.
Financing receivable growth was strong in 2015, demonstrating the company’s ability to expand its portfolio.
However, growth has moderated substantially this year in line with the slowdown in the consumer financing market.
The quality of Al Manar’s financing receivable book has improved substantially since 2012, notwithstanding some slippage in H1 2016, and asset quality indicators compare well with those of its peers locally and in the region.
While an increase in non-performing finance receivables (NPFRs) combined with a contraction in the finance receivable book has recently pushed up Al Manar’s NPFR ratio, the risk to the company is largely mitigated by the improving level of loss coverage.
Al Manar’s ratings are also supported by its good debt service ability and sound liquidity position.
Debt repayments are well matched, with maturing finance receivables and liquidity has been boosted by an increase in cash balances in both 2015 and H1 2016.
Although the company’s funding base is limited, it is nevertheless able to increase funding lines from its existing lender.
Higher borrowing has resulted in pledged collateral also increasing, and the consequent rise in the level of encumbered assets remains a constraint on the ratings.
That said, CI Ratings notes that the company has unutilized credit lines to grow its book of finance receivables and build up its book of unencumbered assets.
A further positive for the company has been the rebuilding of its capital base through internal generation, and retained earnings have been in positive territory since 2014.
An unchanged dividend payment for FY2015, despite the sizable drop in earnings for that year, is, however, a negative factor.
Nonetheless, the company’s leverage has remained low, despite the sizable increase in borrowings.
While CI Ratings normally welcomes low leverage, this can go too far when the company in question is a finance company. Al Manar needs to rebuild its financing receivables portfolio to grow earnings, which will in turn require higher funding availability.
In line with its business model, Al Manar’s revenue remains largely related to its finance receivable book.
A rebound in earnings was seen in H1 2016 supported by the good growth of financing income, although this was partially offset by a further narrowing of the financing differential.
The latter was attributed to the increase in funding costs in line with the higher level of borrowings.
Stabilizing the financing differential is, and will remain, a challenge for Al Manar and its peers, given the low interest rate environment, as well as the high competition in Kuwait.
Competition has increased in recent years with higher interest from the conventional banks. All that said, Al Manar’s core activity remained profitable and its profitability ratios at end H1 2016 compared well with its larger peers, as well as other finance companies in the region, notwithstanding the declining trend.
About Al Manar Financing and Leasing
Al Manar, established in November 2003, conducts its financial services activities in accordance with Islamic Sharia principles and is regulated and supervised by the Central Bank of Kuwait and Capital Market Authority of Kuwait. As at end H1 2016, the Company had assets totaling KWD 53.9 million (USD 178.6 million) with an equity base of KWD 36.7 million (USD 121.6 million) and reported a 21.1% y-o-y growth in net profit to KWD 1.0 million (USD 3.4 million).
Capital Intelligence Ratings (CI Ratings) can be found at http://www.ciratings.com.