Final PR
The Pakistan Credit Rating Agency Limited

Aisha Khalid

Applicable Criteria

  • Rating Modifiers | Outlook and Rating Watch (Jun 16) [View]
  • Correlation between Long-term and Short-term rating (Jun 16) [View]
  • Methodology | Non-Banking Finance Companies (Jan 16) [View]

Related Research

  • Sector Study | Leasing (Jan 16) [View]
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PACRA Assigns Initial Entity Ratings to SME Leasing Limited
 Rating Type Entity
 Action Initial
 Long Term B+
 Short Term B
 Outlook Stable
 Rating Watch -

SME Leasing Limited is a non-deposit taking small leasing company. The company is majorly owned by SME Bank Limited (long-term rating “B” with negative outlook by PACRA). The ratings of SME Leasing are mainly driven by its stand-alone risk profile due to distressed position of parent bank. SME Leasing maintains a weak business and financial profile given higher quantum of non-performing portfolio, deteriorating equity base due to business losses, inadequate funding profile, and low liquidity. The management is currently focused to make recoveries from delinquent portfolio. In the recent period since 2015, the company while following a cautious approach has managed to build asset quality book; thus gradual reduction in losses. Although contained, higher operational expenses remained a drag and resultant losses caused equity erosion. Low funding base, currently limited to a financing facility provided by the parent bank – SME Bank, is a key constraint in improvement in business profile. However, the management is in discussions with relevant stakeholders to explore options to increase the funding base and/or lower its finance cost by conversion of existing facility to preference shares. Upon availability of required funding, the management expects fast-track turnaround in performance, enabling the company to generate profits, with a build up of good quality asset book. However, materialization of these efforts is yet to be seen.

The management’s efforts to curtail the operational losses are important to continue. Meanwhile, improvement in asset quality is crucial. Fresh injection of funds would be required to strengthen the company’s business profile; this would also have positive implication on the ratings. However, any material deterioration in existing risk profile of the company would negatively impact the ratings.
About the Entity
SME Leasing Limited, a non-deposit taking leasing company in Pakistan, commenced Operations in 2002. SMEL's major shareholder (~73%), is SME Bank Limited. SME bank is rated B/B by PACRA as on April 2016. During the year, SMEL has acquired leasing license for three years from SECP as non-deposit taking company.

The Board of Directors (BoD) comprises six members, including the Chief Executive Officer. It constitutes two nominees of SMEL and three independent directors. New CEO joined the company in 2015. The company has a small and lean organizational structure.
The primary function of PACRA is to evaluate the capacity and willingness of an entity to honor its obligations. Our ratings reflect an independent, professional and impartial assessment of the risks associated with a particular instrument or an entity. PACRA's comprehensive offerings include instrument and entity credit ratings, insurer financial strength ratings, fund ratings, asset manager ratings and real estate gradings. PACRA opinion is not a recommendation to purchase, sell or hold a security, in as much as it does not comment on the security's market price or suitability for a particular investor.