Fitch upgrades People’s Bank to ‘AA-’; revises outlook to positive

Fitch Ratings Lanka last week upgraded People’s Bank’s (PB) National Long-term rating to ‘AA-(lka)’ from ‘A(lka)’ and simultaneously revised the Outlook to Positive from Stable. The agency has also affirmed PB’s Individual rating at ‘D/E’ and Support rating at ‘4’.

The upgrade largely reflects Fitch’s view of PB’s increased importance to the state in terms of the bank’s role in supporting the state’s greater focus on economic development following the cessation of the civil war, aided by PB’s widely distributed presence throughout Sri Lanka. 

Fitch also recognises that PB provided for the liability arising from oil derivative contracts, which was an overhang on its capital position, and continued to maintain healthy capital adequacy ratios (CARs) in the face of strong growth.

The Positive Outlook largely reflects the prospect of a potential improvement in the government’s profile as indicated by the Positive Outlook on Sri Lanka’s Long-term Issuer Default Rating of ‘B+’ and the consequent increased capacity of the government to provide support to the bank in view of its systemic importance and importance to the government.

PB’s ratings reflect its systemic importance as the second-largest bank in Sri Lanka, state ownership, and strong franchise.

While the banking sector experienced a loan book contraction in 2009 on the back of negative private sector credit growth, PB’s loan book grew by 14.2% yoy in 2009, driven mostly by lending to state-owned enterprises (SOEs). Consequently, loans to the state sector (government of Sri Lanka and SOEs) increased to 21% of the bank’s loans at end-2009 (end-2008: 12%).

However, predominant exposure remains in the consumer and retail segment (67% of loans at end-2009). This includes PB’s significant exposure to pawning advances (gold-backed loans), which accounted for about 30% loans at end-2009. The bank continues to be the market leader in pawning, accounting for 49% of the banking sector pawning advances at end-2009.

PB’s asset quality came under stress in 2009, with an increase in NPLs as observed across the banking sector. Its gross NPL ratio increased to 6.7% in H110 (end-2009: 6.5%). However, Fitch expects asset quality pressures to ease on account of an improving macro-economic environment.

PB made a provision of Rs. 3.18 b in 2009 against its exposure under oil derivative contracts with Ceylon Petroleum Corporation. However, the bank’s pre-provision return on assets increased to 3.5% in 2009 (2008: 2.8%) mostly due to wider net interest margins. The contribution to consolidated net income from the leasing segment remained substantial at 26% in 2009.

Supported by its resilient retail franchise and extensive branch network, PB recorded deposit growth of 6.8% and 22.7% in H110 and 2009, respectively. The proportion of demand and savings deposits to total deposits has been gradually reducing, and constituted 53% of PB’s deposits at end-2009 (2007: 60%).

PB reported core and total CARs of 8.4% and 13.3%, respectively, in H110; its tier II capital was boosted by the further issuance of subordinated debentures of Rs. 2.5 b in Q409. PB’s equity/assets ratio of 4.6% at H110 is considered to be low in view of its scale of operations and systemic importance. Dividend payout in the form of a special levy remained at 29% of PB’s net income in 2009.

PB is Sri Lanka’s second-largest licensed commercial bank (15.8% of banking system assets at end-2009) and is 92% owned by the Government of Sri Lanka. The bank has an extensive network of 329 branches and 341 outlets. The PB group includes People’s Leasing Company Ltd, which carries out most of the group’s leasing business.