LEASING SECTOR REVISITED

By Shahid Hameed
Nov 25 - Dec 01, 2002

The overall performance of the Leasing Sector in Pakistan has to some extent improved over the last two years despite negative fallout of the September 11 episode, which had adversely affected most of the economies of the world, with particular reference to Pakistan. As a consequence of increased globalization, important international economic and political events do impact the economies of various countries, which are directly or indirectly related in terms of geo-political situation, trade, commerce, etc. Despite these exogenous factors, which may have temporary or semi permanent effects on the domestic economy of a country, other indigenous factors also play an important role on the performance of various sectors of the economy. These may be classified into two categories namely general economic environment and industry specific factors.

GENERAL ECONOMIC ENVIRONMENT

Being a developing state, Pakistan's economy is behest with a number of structural and other related problems, which in turn adversely affects its overall economic environment having impact on its various sectors. Pakistan's current major economic problems include low economic growth, recession, fiscal deficit, trade imbalance, growing debt burden, falling revenues, rising poverty levels, poor state of social indicators, deterioration in governance, unemployment, low productivity, high tax burden, high utility prices, frequent changes in economic policies, low or negative investment both foreign and local, etc. The already precarious situation has been further aggravated by political instability and resultant law and order situation. These economic problems have created an economic environment, which is non-conducive towards investment both foreign and local, leading to low growth, recession, unemployment, increased debt burden, increased poverty, etc. With decreasing growth and resultant recession, the demand for investment financing also diminishes, thereby adversely affecting the entire financial sector. Leasing being an important segment of the financial sector is also affected by the prevailing economic scenario.

Despite the political crisis followed by events of September 11 and its eventual fallout, alarming border situation and worst drought in recent history, the sound economic policies of the present government during the last three years have paid dividends and have proved to be a harbinger for sustainable growth and overall improved general economic environment, which is conducive for growth and investment.

According to the recently published State Bank of Pakistan's Annual Report (2001-02), Pakistan's economy performed "reasonably well" in FY 02 thereby improving a number of macroeconomic indicators. In particular, tremendous improvement was witnessed in Pakistan's external sector with trade deficit turning out to be much lower, current account being in surplus and unprecedented appreciation (6.7%) in the value of the Rupee. In addition, there was an upsurge in workers' remittances along with an all time high increase in foreign exchange reserves. Other appreciable improvements included a low inflation rate of 3.5 %, declining trend in interest rates, a lower debt profile both relating to external and internal debt, etc. Real GDP growth was witnessed at 3.5% as compared to only 2.5%, experienced during the previous year. Agricultural sector registered an overall growth of 1.4% with major crops showing a negative growth of -0.5%. Large scale manufacturing sector also registered a much lower growth rate of 4 % as compared to 7.6 % registered during FY 01. With improved economic environment coupled with political stability just around the corner, enhanced economic activity may not be a far cry, assuming an investment-led growth scenario.

MAJOR ISSUES

A number of major issues have also been responsible for slow growth of the leasing sector in Pakistan, which may be summarized as follows:

* Mushroom growth of leasing companies, generally un-related to market niche.
* Deviation from its primary scope of activity of BMR financing and venturing into project financing like other DFIs.
* Lack of understanding of leasing concept, as a mode of financing by majority of
clientele.
* Lack of effective credit marketing.
* Lack of effective human resource development for marketing personnel.
* Concentration of leasing activities to major cities.
* Lack of availability of appropriate credit culture in Pakistan.
* Lack of appropriate legal cover.
* Lack of level playing field for leasing companies against commercial banks and DFIs, with lower costs of funds.
* Non-availability of long term funds.
* Increasing cost of funds
* Decreasing net margins.
* Mismatch of long term and short term funds.
* Increased reliance on Banks and DFIs for fund mobilization and less on alternate sources like TFCs, COIs, Credit Lines, Securitization, etc.
* Lack of availability of foreign credit lines.
* Lack of innovative products.
* Increase in NPLs and a corresponding decrease in profits due to provisioning.

INDUSTRY SPECIFIC ISSUES

A number of industry specific issues have also been impeding the growth of leasing sector in the country. Many of these issues have already been settled with untiring efforts of the Leasing Association of Pakistan and greater understanding and cooperation extended by the Securities and Exchange Commission of Pakistan. A list of such issues is summarized as follows:

* Non-availability of initial depreciation allowance to leasing companies, which has been allowed w.e.f. July1, 2002.
* The ceiling for claiming depreciation allowance has since been enhanced from Rs. 600,000 to Rs. 750,000.
* Sales Tax on acquisition of vehicles from manufacturers, which has since been exempted.
* Inclusion of Operating Lease in the definition of 'supply' under the Sales Tax Act 1990, which has since been made at par with Finance Lease after its exclusion from the said definition.
* Front End Fee or Lease Key Money has since been made non taxable.
* Leasing companies have now been allowed to extend financing facilities to
warehouses, hospitals and educational institutions.
* Single Party or Group exposure limit has since been increased from 20 % of net investment in leases to 30 % of un-impaired capital and resources of a leasing company.
* The margin requirement for financing against COIs and COMs of NBFIs has since been decreased from 25 % to 20 %.
* Despite expiry of final deadline of June 30, 2001 for meeting the minimum paid-up capital requirement of Rs. 200 million for leasing companies, necessary relaxation is being provided by the SECP to such companies that have submitted viable plans for meeting the requirement either through increase in capital or mergers.
* The SECP has also been facilitating mergers among the leasing companies.

MACRO PERSPECTIVE OF THE LEASING SECTOR

In line with visible improvements witnessed in the overall economic scenario in Pakistan, the Leasing sector has also shown overall improvement in some of its aggregate indicators particularly since 1999. As is evident from Table 1, the total paid-up capital has increased particularly due to minimum paid-up capital requirement of Rs. 200 million though the total number of leasing companies has decreased from 32 to 29, due to some mergers. There has been an appreciable increase in investment in Lease Finance from Rs. 29.0 billion in 1999 to Rs. 36.7 billion in 2001. Aggregate revenues have also increased from Rs. 5.5 billion in 1999 to Rs. 6.4 billion in 2001. Overall net profit has however decreased from Rs. 451 million to Rs. 398 million during the period under review, mainly due to higher financial charges which increased from 3.6 billion in 1999 to Rs. 4.2 billion in 2001.

Table (1)
LEASING SECTOR'S AGGREGATE INDICATORS
(1997 - 2001)
(Rs. In Million)

Indicators

1997

1998

1999

2000

2001

No. of Companies

33

33

32

32

29

Paid-up Capital

4,234

4,352

4,566

4,762

4,966

Retained Earnings

3,234

3,359

3,305

3,441

3,536

Investment in Lease Finance

25,164

28,111

29,039

30,281

36,680

Investments

2,590

2,724

2,664

3,162

3,646

Borrowings

21,603

23,173

23,765

25,740

31,472

Revenues

5,046

5,315

5,528

5,704

6,401

Net Profit

906

610

451

573

398

Financial Charges

3,006

3,293

3,634

3,709

4,228

Operating Expenditure

959

1,198

1,294

1368

1,696

Taxation

155

293

149

151

160

Total Assets

30,824

33,279

35,579

39,147

45,222

Source: Pakistan Leasing Year Book 2001

Borrowings have also increased from Rs. 23.8 billion in 1999 to Rs. 31.5 billion during 2001. Total aggregate assets of all the leasing companies also enhanced appreciably from Rs. 35.6 billion in 1999 to Rs. 45.2 billion during 2001.

KEY SECTOR RATIOS

Major aggregate key ratios of the leasing sector during the period 1999 to 2001 were however, adversely affected by the aforementioned gray areas as is evident from Table 2. However, these being average sector ratios do not represent individual cases, some of which may be much higher than others.

Table (2)
LEASING SECTOR'S AGGREGATE KEY RATIOS
 (1997 - 2001)

Key Ratios

1997

1998

1999

2000

2001

Earning per Share (Rs.)

1.67

1.40

0.79

0.92

0.59

Return on Equity (%)

11.88

7.91

5.73

6.58

3.81

Return on Investment (%)

2.81

1.79

1.25

1.36

0.69

Net Profit Margin (%)

17.69

11.48

8.16

9.31

4.96

Revenue per Share (Rs.)

9.41

12.21

9.70

9.86

11.98

Time Interest Earned (X)

1.35

1.25

1.17

1.19

1.11

Financial Charges / Total Expenses (%)

72.76

69.99

71.57

70.32

69.38

Debt Leverage (X)

3.23

3.42

3.60

3.84

4.45

Leasing & Financing/ Net Worth (X)

3.43

3.59

3.57

3.84

4.45

Total Assets/ Net Worth (X)

4.23

4.42

4.60

4.84

5.49

Current Ratio (X)

1.25

1.17

1.24

1.38

1.29

Financial Charges / Total Revenue (%)

-

-

65.73

63.78

65.94

Source: Pakistan Leasing Year Book 2001

During the period under review, earning per share declined from Rs. 0.79 in 1999 to Rs. 0.59 during 2001. However, ORIX Leasing Pakistan Limited had a EPS of Rs. 7.66 during 2001. Return on equity also decreased from 5.73 in 1999 to 3.81 during 2001, while return on investment also decreased from 1.25 in 1999 to 0.69 during 2001. However, ROE of First Grindlays Modaraba during 2001 was 22.12%. Leasing sector's average return on investment decreased from 1.25 % in 1999 to 0.69 % during 2001. However, First Habib Bank Modaraba's ROI during 2001 remained at 12.38 %. Sector's average net profit margin also reduced substantially from 8.16 % in 1999 to 4.96 % during 2001. However, Pak Gulf Leasing Company Ltd. experienced net profit margin of 47 %. Leasing sector's average revenue per share witnessed appreciable increase from Rs. 9.70 in 1999 to Rs. 11.98 during 2001. However, ORIX Leasing Pakistan Limited earned an impressive revenue per share of Rs. 66.86 during 2001. Similarly, sector's current ratio also increased from 1.24 in 1999 to 1.29 during 2001. However, Ibrahim Leasing Limited witnessed a current ratio of 8.71 during 2001. Total assets to networth ratio of the leasing sector also improved from 4.60 in 1999 to 5.49 in 2001. Due mainly to increasing financial cost, the sector's total average financial cost to total expenses decreased from 71.57 in 1999 to 69.38 in 2001. However, leasing sector's other important ratios like leasing & financing to networth, financial charges to total revenue, etc. also improved during the period under review.

TOP TEN PERFORMING LEASING COMPANIES

In order to analyse performance of individual leasing companies during 2001, a number of Tables are placed at A to J, highlighting top ten performing leasing companies based on various performance indicators:

Table (A)
PERFORMANCE OF TOP TEN LEASING COMPANIES BY TOTAL REVENUES DURING 2001

(Rs. in Million)

Ranking

Top Ten Leasing Companies/ Modarabas

Total Revenues

1.

ORIX Leasing Pakistan Limited

1,3 46.55

2.

Askari Leasing Limited

1,172.00

3.

First Grindlays Modaraba

1,011.85

4.

PILCORP

658.67

5.

National Development Leasing Corporation

643.38

6.

BRR International Modaraba

585.83

7.

First Crescent Modaraba

545.94

8.

First Habib Modaraba

412.00

9.

Saudi Pak Leasing Company Limited

385.37

10.

Atlas Lease Limited

309.07

Source: Pakistan Leasing Year Book 2001

 


 

Table (B)
PERFORMANCE OF TOP TEN LEASING COMPANIES BY NET PROFIT DURING 2001

(Rs. in Million)

Ranking

Top Ten Leasing Companies/ Modarabas

Net Profit

1.

ORIX Leasing Pakistan Limited

154.25

2.

First Grindlays Modaraba

148.82

3.

BRR International Modaraba

76.85

4.

First Habib Modaraba

69.00

5.

Askari Leasing Limited

64.00

6.

National Development Leasing Corporation

47.02

7.

First Habib Bank Modaraba

54.28

8. (a)

Crescent Leasing Corporation Ltd.

42.26

8. (b) 

Union Leasing Limited

42.26

9.

Paramount Leasing Limited

38.54

10.

Saudi Pak Leasing Limited

34.35

Source: Pakistan Leasing Year Book 2001

 


 

Table (C)
PERFORMANCE OF TOP TEN LEASING COMPANIES BY DIVIDEND PAYOUT DURING 2001

(RS.)

Ranking

Top Ten Leasing Companies

Dividend Per Share

1.

Askari Leasing Limited

9.10

2.

PILCORP

4.59

3.

First Grindlays Modaraba

3.30

4.

ORIX Leasing Pakistan Limited

2.50 plus 20 % S. Div.

5.

Union Leasing Limited

1.50 plus 0.15 % S. Div.

6.

First Habib Bank Modaraba

1.45

7.

BRR International Modaraba

1.30

8.

First Habib Modaraba

1.13

9. (a)

Dawood Leasing Company Limited

1.00

9. (b)

First Fidelity Leasing Modaraba

1.00

9. (c)

Grays Leasing Modaraba

1.00

10.

Paramount Leasing Limited

0.80

Source: Pakistan Leasing Year Book 2001

 


 

Table (D)
PERFORMANCE OF TOP TEN LEASING COMPANIES BY NET PROFIT MARGIN DURING 2001

(%)

Ranking

Top Ten Leasing Companies

Net Profit Margin

1.

Pak Gulf Leasing Company Ltd.

47.00

2.

Pak Apex Leasing Company Ltd.

41.52

3.

Grays Leasing Limited

37.54

4.

Ibrahim Leasing Limited

36.20

5.

Sigma Leasing Company Ltd.

22.39

6.

Crescent Leasing Corporation Ltd.

21.83

7.

Paramount Leasing Limited

18.32

8.

Security Leasing Corporation Ltd.

17.92

9.

First Grindlays Modaraba

14.88

10.

B.R.R. International Modaraba

13.11

Source: Pakistan Leasing Year Book 2001

 


 

Table (E)
PERFORMANCE OF TOP TEN LEASING COMPANIES BY REVENUE PER SHARE DURING 2001

(RS.)

Ranking

Top Ten Leasing Companies

Revenue Per Share

1.

ORIX Leasing Pakistan Limited

66.86

2.

Askari Leasing Limited

36.17

3.

PILCORP

30.23

4.

First Grindlays Modaraba

27.04

5.

First Crescent Modaraba

24.14

6.

Saudi Pak Leasing Limited

17.51

7.

Atlas Lease Limited

15.35

8.

B.R.R. International Modaraba

12.15

9.

Dawood Leasing Company Limited

10.91

10.

Security Leasing Corporation Ltd.

10.24

Source: Pakistan Leasing Year Book 2001

 


 

Table (F)
PERFORMANCE OF TOP TEN LEASING COMPANIES BY EARNING PER SHARE DURING 2001

(RS.)

Ranking

Top Ten Leasing Companies

Earning Per Share

1.

ORIX Leasing Pakistan Limited

7.66

2.

First Grindlays Modaraba

3.98

3.

Grays Leasing Limited

2.51

4.

Crescent Leasing Corporation Ltd.

2.10

5.

Askari Leasing Limited

1.98

6.

B.R.R. International Modaraba

1.59

7.

Saudi Pak Leasing Limited

1.56

8.

Paramount Leasing Limited

1.54

9.

First Habib Bank Modaraba

1.37

10.

First Habib Modaraba

1.36

Source: Pakistan Leasing Year Book 2001

 


 

Table (G)
PERFORMANCE OF TOP TEN LEASING COMPANIES BY RETURN ON EQUITY DURING 2001

(%)

Ranking

Top Ten Leasing Companies

Return on Equity

1.

First Grindlays Modaraba

22.12

2.

Grays Leasing Limited

18.29

3.

ORIX Leasing Pakistan Limited

15.77

4.

Union Leasing Limited

14.11

5.

Paramount Leasing Limited

12.30

6.

B.R.R. International Modaraba

11.14

7.

Crescent Leasing Corporation Ltd.

11.10

8.

First Habib Bank Modaraba

11.02

9.

Security Leasing Corporation Ltd.

10.32

10.

Dawood Leasing Company Limited

10.27

Source: Pakistan Leasing Year Book 2001

 


 

Table (H)
PERFORMANCE OF TOP TEN LEASING COMPANIES BY BREAK-UP VALUE DURING 2001

(RS.)

Ranking

Top Ten Leasing Companies

Break-up Value

1.

ORIX Leasing Pakistan Limited

51.15

2.

PILCORP

26.81

3.

Askari Leasing Limited

21.70

4.

Al-Zamin Leasing Modaraba

20.98

5.

Pak Apex Leasing Company Ltd.

19.30

6.

Crescent Leasing Corporation Ltd.

18.92

7.

First Grindlays Modaraba

17.17

8.

Saudi Pak Leasing Limited

16.35

9.

Atlas Lease Limited

16.26

10.

International Multi Leasing Corporation Ltd.

16.04

Source: Pakistan Leasing Year Book 2001

 


 

Table (I)
PERFORMANCE OF TOP TEN LEASING COMPANIES BY CURRENT RATIO DURING 2001

Ranking

Top Ten Leasing Companies

Current Ratio

1.

Ibrahim Leasing Limited

8.71

2.

Pakistan Industrial & Commercial Leasing Ltd.

3.61

3.

International Multi Leasing Corporation Ltd.

2.89

4.

Pak-Gulf Leasing Company Ltd.

2.85

5.

Askari Leasing Limited

2.15

6.

Universal Leasing Corporation Ltd.

1.85

7.

Sigma Leasing Corporation Ltd.

1.72

8.

Trust Leasing Corporation Ltd.

1.68

9.

Pak Apex Leasing Company Ltd.

1.48

10.

Saudi Pak Leasing Limited

1.47

Source: Pakistan Leasing Year Book 2001

 


 

Table (J)
PERFORMANCE OF TOP TEN LEASING COMPANIES BY NET WORKING CAPITAL/NET WORTH DURING 2001

(RS.)

Ranking

Top Ten Leasing Companies

Net Working Capital /Net Worth

1.

Askari Leasing Limited

2,038.00

2.

Saudi Pak Leasing Limited

538.39

3.

Pakistan Industrial & Commercial Leasing Ltd.

515.11

4.

National Development Leasing Corporation

382.86

5.

PILCORP

365.59

6.

Atlas Lease Limited

199.32

7.

ORIX Leasing Pakistan Limited

187.61

8.

Ibrahim Leasing Limited

167.85

9.

Trust Leasing Corporation Ltd.

153.11

10.

Security Leasing Corporation Ltd.

91.61

Source: Pakistan Leasing Year Book 2001

CONCLUSION

While re-visiting and analysing the overall performance of leasing sector in Pakistan particularly during 1999 and 2001, it may well be ascertained that despite economic and industry specific problems adversely affecting the performance of the leasing sector, it has matured and experienced appreciable growth highlighted by various performance indicators. However, some leasing companies have out-performed others based on better financial management, expertise and resources. While majority of leasing companies are concentrating more on vehicle leasing, which needs to be diversified to other avenues like financing of warehouses, hospitals and educational institutions, which have recently been included in leasing sector's domain by the SECP. Besides, alternative long-term fund mobilization activities need to be geared up by the leasing companies for reducing and eliminating mismatch of funds. Mergers and acquisitions also need to be undertaken by various leasing companies for meeting minimum paid-up capital requirement and effective synergy.

This article is in continuation of my earlier article entitled "The Future of Leasing Sector in Pakistan" published in the Pakistan & Gulf Economist of November 6-12, 2000.