Fitch Ratings Lanka yesterday upgraded Pan Asia Banking Corporation Plc’s (PABC) National Long-term rating to ‘BBB (lka)’ from ‘BBB-(lka)’. The Outlook is Stable.
The upgrade of PABC’s rating reflects the bank’s improving asset quality and capitalisation, as well as ongoing structural improvements, which Fitch believes should enable the bank to further strengthen its capital position as well as to further diversify and improve the quality of its loan book over the next two to three years. The Stable Outlook reflects Fitch’s view that PABC’s financial profile will continue to improve over the medium-term, underpinned by ongoing changes within the bank. However, further upgrades would require considerable improvements in terms of loan quality, growth potential and a larger capital buffer to absorb potential losses on bad loans.
Increased recovery efforts further supported by the ongoing economic recovery, as well as improvements to underwriting and risk standards has helped PABC improve the quality of its loan book in 2010. Its nominal NPLs fell by 19% at end-September 2010 from its peak in June 2009; this, together with the bank’s increased exposure to low-risk gold-backed lending, helped improve its gross NPL ratio to 7.7% at end-September 2010 (end-June 2009: 13.4%). Fitch notes that while PABC’s rapid loan growth in 2010 (50% in the nine months ending 30 September 2010 (9M10)) is a concern, growth has been on a small base, and credit risk is mitigated to some extent by its increased exposure to gold-backed loans (16% of advances at end-September 2010 versus 5% at end-2008), as well as improved underwriting standards and closer monitoring. PABC’s LKR442.6m rights issue in May 2010 enabled it to meet the regulatory LKR2.5bn minimum capital requirement (MCR) for commercial banks by the June 2010 deadline. While the regulator has now further enhanced the MCR to LKR5bn — to be met by end 2015, Fitch observes that PABC is on track to meet the interim target of LKR3bn by the end-2011 deadline. Capital adequacy continued to remain comfortable due to PABC’s higher percentage of cash and gold-backed loans, and was further bolstered by the rights issue earlier in the year (tier 1 capital adequacy ratio of 19.2% at end-June 2010). However, Fitch notes that the bank’s available capital buffer to meet potential loan losses (net NPLs/equity: 31.6% at end-September 2010) is weaker than the sector’s (licensed commercial banking (LCB) sector excluding Seylan Bank Plc (‘BBB+(lka)’/Stable): 21.9% at end-June 2010).
Despite pressures arising from higher credit costs and weak credit demand, PABC’s profitability as measured by return on assets (ROA) increased to 1.9% in 2009, boosted by capital and marked-to-market gains on its government securities portfolio. The ROA normalised to 1.5% in 9M10 which was marginally higher than the LCB sector’s, and was supported by strong net interest margins and reduced provisioning costs. PABC’s loan/deposits ratio increased to 91% at end September 2010 (average of 79% in 2009), as deposit growth was unable to keep pace with the bank’s rapid loan expansion. However, PABC stepped up deposit mobilisation efforts in Q410 with a view to increase the size and granularity of its deposit base, which should result in a higher deposit growth over the next 12 months.