PABC’s proposed Rs. 3 b debentures rated BBB by Lanka Rating Agency
Wednesday, 27 August 2014 00:00
Lanka Rating Agency (LRA) has assigned Pan Asia Banking Corporation PLC’s (PABC) respective long- and short-term financial institution ratings at BBB+ and P2. The outlook on the long-term rating is stable. Concurrently, the long-term ratings of the bank’s proposed listed unsecured subordinated redeemable debentures up to Rs. 3 billion (2014/2019) carry an issue rating of BBB.
In keeping with the LRA methodology PABC’s proposed debenture is rated one notch below the entity rating to reflect its subordinated status. The rating is supported by the bank’s average capitalisation, liquidity and improving performance but is tempered by its relatively small size and asset quality.
Incorporated in 1995, PABC is a Licensed Commercial Banks (LCB) operating in Sri Lanka under the Banking Act No. 30 of 1988. The bank remains one of the smallest players in the domestic LCB industry, with an asset base of Rs. 64.9 billion and a loan book of Rs. 44.7 billion as at end-FY Dec 2013. This accounted for 1.29% of the LCB sector assets and 1.31% of sector loans. Nevertheless, the bank has been consolidating its presence in the local arena while improving its franchise during the past five years. As at end-1Q FY Mar 2014, PABC operated 77 branches with 1,232 staff members.
The bank’s asset quality is deemed below average in 2013 as reflected in its asset indicators, which was subsequently showed improving trends in 1Q FY Mar 2014. The weakening of asset quality has been an industry wide phenomenon in 2013, especially in financial institutions with increased exposure to gold backed lending.
PABC’s asset base expanded 15.77% y-o-y to Rs. 64.92 billion as at end-FY December 2013, yet net loans and advances grew only at 3.53% in view of slower credit growth in FY Dec 2013. Absolute gross Non Performing Loans (NPL) climbed 90.54% y-o-y to Rs. 3.389 billion as at end-FY Dec 2013 (end-FY Dec 2012: 1.77 billion) on the back of an increase in new NPLs, mainly stemming from gold backed loans.
However, strong recoveries and disposal of collateral within the pawning portfolio together with growth of its credit assets had enabled the bank to maintain a relatively lower NPL ratio of 7.80% in 1Q FY2014 (FY Dec 2013: 8.01%). LRA expects the ratio to ease going forward, in view of the gradual improvement in macro-economic conditions, the bank’s drive towards other sectors and reduced exposure to pawning and gold loans.
PABC’s Net Interest Margin (NIM) declined to 3.81% in FY Mar 2013 (FY Mar 2012: 5.12%), driven by the proportionate reduction of high yielding products such as pawning within the credit asset mix. However with the re-pricing of deposits and credit growth in 1Q FY 2014 NIM had improved to 4.75%. NIM is expected to remain healthy with the increase in credit growth and moves by the bank to focus on personal banking and SME related lending products which yield higher returns.
The bank’s performance is deemed average in comparison to peer performance indicators. The bank’s NIM and cost-to-income ratio compare well with LCB industry peers especially in 1Q FY 2014. Going forward LRA expects NIMs to be in line with current levels in the short term, with overall performance expected to improve in line with increased focus on lending to growth areas of the economy.
PABCs funding composition remained relatively unchanged in fiscal 2013. Customer deposits increased in prominence within its funding base, accounting for 91.09% of the mix as at end-December 2013. Deposits grew 12.37 % y-o-y in fiscal 2013 and 16.57% (annualised) in 1Q FY Dec 2014, supported by targeted deposit mobilisation.
Meanwhile, the loans to deposits ratio improved from 89.20% as at end-December 2012 to 80.49% as at end-December 2013 reflective of the faster growth in the deposit base compared to credit assets. On a related note, Pan Asia Bank’s liquidity is viewed to be in line with peers’ with its statutory liquid-asset ratio As at end-December 2013 improving to 23.77 % from 21.15% as at end-December 2012.
Although the bank’s capitalisation levels are in line with statutory requirements with tier-1 and overall risk-weighted capital-adequacy ratios (RWCARs) clocking at 10.27% and 11.91% respectively as at end-December 2013, these levels are viewed to be average. In line with credit asset expansion, PABCs tier-1 and overall RWCAR moderated to 9.26% and 10.70% respectively as at end 1Q FY 2014.