Fitch affirms Pan Asia Banking Corp at ‘BBB’

Fitch Ratings Lanka said yesterday it has affirmed Pan Asia Banking Corporation PLC’s (PABC) National Long-Term rating at ‘BBB (lka)’ with a Stable Outlook. Its proposed subordinated debentures of up to Rs. 2 billion have been affirmed at ‘BBB-(lka)’.

PABC’s ratings reflect continued improvements in its credit profile relative to local peers, particularly asset quality and capitalisation, supported by structural changes within the bank over 2009-2010. The ratings also reflect the bank’s small but steadily growing franchise and market share supported by recent branch expansion.

The bank’s credit metrics have moved closer to that of higher-rated peers. Its ratings could be upgraded if it maintains capitalisation and liquidity amid its rapid asset growth as was experienced from 2010 to 1H11, while also sustaining improvements in asset quality.

PABC’s gross non-performing loan (NPL) ratio of 4.3 per cent at end-September 2011 (end-2010: 5.4 per cent) is in line with higher-rated peers. The improvement in gross NPL ratio is attributed to an absolute decline in NPLs from closer monitoring and recovery efforts, a better credit environment, increased proportion of gold-backed loans (15 per cent of advances), and rapid loan growth in 2010-2011.

Fitch notes that PABC’s recent growth should be carefully managed to maintain asset quality at current levels.

PABC’s deposit and loan growth was higher than the sector from 2010 to 2011, supported by branch expansion during the period. Loan growth of 31 per cent in 1H11 and 85 per cent in 2010 (private commercial bank sector: 25 per cent and 15 per cent respectively) was driven by growth in the bank’s SME and retail segments, with key growth products being overdrafts and gold-backed loans. Although loans/deposits of 91 per cent at June 2011 (average of 82 per cent from 2007 to 2009) was in line with the sector figure of 92 per cent, Fitch notes that the bank’s rapid loan growth has contributed to a lower proportion of liquid assets than peers.

Return on assets increased to 2.3 per cent in 1H11 (2010: 1.4 per cent) despite net interest margins narrowing to 6.4 per cent from 6.9 per cent in 2010, as the bank better managed its costs. Provision reversals accounted for 0.1 per cent of average assets in 1H11, compared to a 0.1 per cent provision cost in 2010.

Operating cost efficiencies also improved as operating costs fell to 3.8 per cent of average assets in 1H11 (2010: 4.2 per cent) due to assets generated by new branches. Profitability should continue to benefit from provision reversals in 2H11 (due to reductions in the statutory general provision) and lower effective taxes.

Although PABC’s Tier 1 capital adequacy ratio (CAR) of 12.2 per cent at end-June 2011 (2010: 14.6 per cent) was stronger than peers’, total CAR fell to 12.7 per cent (2010: 15.3 per cent) due to rapid growth in 2010-2011. Fitch notes that while PABC’s incremental capital generation is supported by high profitability, its total capital base may require strengthening if its current growth momentum on its lending (excluding gold-backed advances) is sustained.

PABC is a licensed commercial bank (LCB), 41 per cent owned by a high net-worth businessman K.D.D. Perera and related parties. It accounted for 1.1 per cent of LCB sector assets at end-2010 (2009: 0.9 per cent), and had 56 branches at end-September 2011 (end-2009: 35).