Fitch revises People’s Merchant Bank’s outlook to stable; Affirms at ‘BB+’

Fitch Ratings Lanka yesterday revised People’s Merchant Bank PLC’s (PMB) Outlook to Stable from Negative. Its National Long-Term rating has been affirmed at ‘BB+(lka)’.

The Outlook revision reflects an improvement in PMB’s financial profile and the ongoing efforts of the company to continue to improve its financial profile in terms of profitability, asset quality and solvency as indicated by net NPL/equity.

PMB’s rating reflects its still weak financial profile. However, Fitch takes comfort from the company’s linkages with its main shareholder, state-owned People’s Bank (Sri Lanka) (PB; ‘AA-(lka)’/Positive), including a common brand identity and funding.

PMB’s financial profile continued to be impacted in FY10 and Q3FY11 by the acquisition of its subsidiaries in 2009. In particular, Fitch notes that losses incurred at its subsidiary - PMB Credit Card Company Ltd (PMBCC) - contributed significantly to losses incurred by the group. PMB transferred PMBCC’s significant assets and liabilities to the company in Q3FY11. Losses incurred eroded equity of LKR250m raised through a rights issue in Q4FY10. PMB expects to raise capital through the divestiture of a stake in registered finance company (RFC) subsidiary - People’s Merchant Finance Ltd (PMF) - by end-June 2011 as required by regulations applicable to RFCs. Fitch is of the view that PMB’s profitability and capitalisation could improve following the proposed divestment.

PMB’s asset quality improved in Q3FY11, largely reflecting the improvement in the credit environment, as observed across the sector. The gross NPL ratio for the company and group declined to 23.5% and 23.8% at Q3FY11, respectively, from 30.2% and 31.4% at FYE10. Fitch notes that PMB’s asset quality may improve further in view of the recent institution of a dedicated recoveries division and consequent increased focus on recoveries.

The rating may be upgraded if there is a substantial and sustained improvement in PMB’s standalone financial profile in terms of solvency, asset quality, and profitability. Conversely, a deterioration in the company’s profitability through its inability to stem losses, and/or deterioration in its asset quality and solvency could result in a rating downgrade. The rating could also be affected by a change in circumstances that would warrant a review of Fitch’s opinion on the expectations of support from PB.

Established in 1983, PMB is regulated as a special leasing company. PB owns 39.2% of its equity (26% directly and 13% indirectly through PB’s 100% held subsidiary People’s Leasing Company Ltd (‘A(lka)’/Stable)).

In support of the government’s initiative to aid liquidity-stressed financial institutions, PMB acquired ABC Credit Card Company Limited (renamed PMBCC) in 2009. Through PMBCC, PMB acquired Silvereen Finance Company Limited (renamed PMF) in 2009.