ICRA Lanka revises ratings of People’s Bank

ICRA Lanka Ltd. has revised the Issuer Rating of People’s Bank to [SL]AA and the issue rating of Basel III Compliant, Unlisted, Rated, Unsecured, Subordinated, Perpetual, Additional Tier I (AT1) Capital Bond of Rs. 6,000 million to [SL]A+ (hyb). 

The outlook on the ratings are revised to Negative from rating under watch with Negative implications.

The revision in People Bank’s ratings takes into consideration the intensified risk in the overall banking sector of Sri Lanka; particularly from the limited foreign-currency funding and elevated foreign-currency refinancing risk on account of the sovereign rating downgrades. The rating revision also considers the impact from the suspension of repayments of foreign-currency debt by the CBSL. 

However, ICRA Lanka notes that PB is in a relatively better position due to its lower exposure towards dollar-denominated sovereign debt in comparison to its peer banks. PB’s total investments in dollar-denominated sovereign instruments accounted for 9.7% of the total Networth as on 31 March. 

In addition, ICRA Lanka notes that close to 50% of PB’s loan book is exposed to the state and State-Owned Enterprises (SOEs), thereby increasing PB’s risk profile. The rating revision also factors in the envisaged rise in slippages from Q2CY2022 due to the business disruptions from fuel shortage, power outage and various other macro-challenges; majority of these challenges intensified from April 2022 onwards.

The mark-to-market impact from the sharp interest rate hike by 700 bps in April 2022 and further by 100 bps in July 2022 is limited on the bank’s treasury investment portfolio due to majority being recognised at amortised cost. However, ICRA Lanka expects the core margins to be affected due to deposit repricing. 

ICRA Lanka does not expect much stress in terms of the local currency-liquidity especially given the sizeable amount of liquidity absorbed back into the financial sector post the sharp increase in the systemic rates. Established branch network of PB (743 as in 31 March) will help the bank to attract much-needed rupee liquidity. ICRA Lanka is however cognisant of the sizeable negative cumulative Asset Liability Mismatch (ALM) for less than 1 year of the bank.

Sharp devaluation of the rupee which increased risk-weighted assets pertaining to foreign currency loans and investments resulted in a moderation of the bank’s capital profile. PB’s Tier 1 capital ratio moderated to 11.04% in 31 March 2022 from 12.56% in 31 December 2021 as against the regulatory requirement of 9.50% in 31 March 2022. 

While ICRA Lanka notes the measures implemented by the Central Bank of Sri Lanka (CBSL) to support the banking sector which includes the flexibility to draw down the Capital Conservation Buffer (“CCB”) up to 2.5%, expects the same would diminish the capital buffers available for future use especially in the current year wherein the economy is expected to face further challenges from the worsening macro parameters. ICRA Lanka also does not envisage much capital support from the Government of Sri Lanka, given its stretched fiscal outlook.

The negative outlook reflects the envisaged weakening of asset quality indicators from Q2CY2022 on account of the current state of the economy while the capital buffers are also expected to remain stretched.  The negative outlook also reflects the tight dollar liquidity faced by PB, along with rest of the peer banks. The outlook may be revised to ‘Stable’ in case of a steady improvement in its capital profile with healthy buffers over the regulatory requirements while also improving and maintaining healthy asset quality indicators and liquidity profiles.