Fitch revises Pan Asia Bank’s Outlook to stable; Affirms at ‘BBB’
Friday, 1 November 2013 03:32
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Fitch Ratings Lanka has revised Pan Asia Banking Corporation PLC’s (PABC) Rating Outlook to Stable from Positive and affirmed the bank’s National Long-Term Rating at ‘BBB(lka)’. The agency has also affirmed PABC’s subordinated debentures at ‘BBB-(lka)’.
Key Rating Drivers
The revision of the Outlook on PABC reflects the unanticipated rapid deterioration in its credit profile. PABC’s new and un-provided non-performing loans (NPLs) exceed that of its peers, exerting additional pressure on its declining capitalisation. These negative developments are offset by Fitch’s expectation for a slowdown in loans growth, sufficient internal revenue generation to meet capital requirements and PABC’s acceptable funding profile.
PABC’s NPL ratio (including interest in suspense) increased to 11.8% in H113 (regulatory NPL ratio of 7.8%) from 7.4% at end-2012. This was driven largely by NPLs from gold-backed advances (65% of the increase in NPLs). Consequently, un-provided NPLs increased to 68.7% of equity at end-H113 (end-2012: 31.3%).
The Stable Outlook factors in Fitch’s expectation that NPL accretion from pawning advances is likely to slow due to measures taken by the bank to reduce the loan-to-value ratios and loan tenors, although challenges in collateral disposal and higher impairment charges are likely to pressure profitability.
The bank also intends to develop niche businesses, including credit-card advances. Fitch believes the bank’s strategy to acquire market share in the highly competitive credit-card lending segment could further hurt its asset quality. However, loan growth for the rest of 2013 should remain relatively muted due to weak credit demand in a challenging macroeconomic environment. PABC experienced a significant deceleration in lending in H113 (3% growth compared with 22.7% growth in 2012), in line with the sector. Its main loan book exposures were overdrafts (33% at 2012) and pawning (17%).
Fitch continues to believe that the bank will achieve, via profit accretion, the Central Bank’s requirement that domestic banks have minimum core capital of Rs. 4 billion by end-2013. PABC’s Fitch Core Capital ratio declined to 11% in H113 (2012:13.1%) as a result of a dividend payout.
Acquiring and sustaining a strong current and savings account base is likely to remain a challenge for PABC due to its still small, but expanding, franchise in terms of market share. Current and savings accounts declined to 17% of total deposits in 2012 from 27% in 2011 due to a shift in the deposit mix away from this category toward fixed deposits that pay higher interest rates.
The subordinated debt is rated one notch lower than the issuer rating to reflect its gone-concern loss-absorption quality in the event of liquidation, in line with Fitch’s criteria for rating such securities.
Rating sensitivities
The rating could be downgraded if the bank fails to halt current negative trends in loan quality and capitalisation. In addition, PABC’s higher risk appetite to gain market share is negative for the rating.
Fitch sees limited potential for a positive rating action at this stage. Over the medium-term, a stronger franchise, stable performance and better balanced funding structure would be necessary for an upgrade.
The subordinated debt rating will move in tandem with the long-term rating.
PABC accounted for 1.5% of banking sector assets in Sri Lanka at end-2012 and operated through a network of 73 branches.
