RAM Ratings Lanka assigns AAA/P1 ratings to People’s Bank

RAM Ratings Lanka has assigned respective long- and short-term ratings of AAA and P1 to People’s Bank; the long-term rating has a stable outlook. The ratings are premised on the Bank’s State ownership and systemic importance as Sri Lanka’s second-largest licensed commercial bank. In addition, the ratings are also supported by the Bank’s extensive branch network.

Incorporated in 1961 under the People’s Bank Act No. 29 of 1961, PB is 92.27%-owned by the government and comes directly under the purview of the Ministry of Finance. PB is currently the second-largest bank in the country, accounting for 19.03% of the industry’s assets as at end-December 2009. The two biggest State banks (i.e. Bank of Ceylon and PB) make up the bulk of the industry’s assets, 40.53% as at end-December 2009.

Meanwhile, the Bank also operates the largest branch network in the domestic financial industry, with a total of 670 branches as at end-December 2009. As a State-owned entity, PB’s policies are broadly aligned with the government’s macroeconomic objectives. As the Bank plays a pivotal role in rural economic development, state support is likely to be forthcoming if the need arises.

RAM Ratings Lanka notes that PB experienced an influx of Non-Performing Loans in FYE 31 December 2009, in line with the weaker macroeconomic conditions. Consequently, it’s absolute NPLs spiked up 12.23% year-on-year to Rs. 20.04 billion at the end of the year.

Despite its focus on the rural economy, which is perceived to be high risk, PB’s gross NPL ratio of 6.50% as at end-December 2009 was lower than those of its industry peers. Excluding several Government-related NPLs (which are not technically required to be classified as non-performing), the ratio came up to 6.41% as at the same date.

RAM Ratings Lanka notes that the Bank’s gross NPL ratio had improved further – albeit marginally – to 6.39% as at end-September 2010. On a separate note, PB’s investment portfolio is deemed to be of low risk as it is dominated by government securities, which constituted 99.34% of its total investments as at end-FY Dec 2009

Meanwhile, the Bank’s performance is supported by its better-than-industry Net Interest Margins; its NIM clocked in at 5.48% as at end-FY Dec 2009, wider than those of its industry peers. This is mainly due to the Bank’s focus on the high-yielding pawning segment, coupled with its low-cost deposit base.

That said, PB’s performance had been hampered by hefty overheads arising from its branch network and inflated workforce; the Bank’s cost-to-income ratio (excluding a one-off provision charge of Rs. 3.18 billion) came up to 66.41% as at end-FY Dec 2009, weaker than those of its peers.

Elsewhere, deposits dominated PB’s funding structure as at end-FY Dec 2009, with a 94.22%-share (or Rs. 396.46 billion). The Bank’s extensive branch network and the credibility associated with state ownership have enabled it to chart strong growth in its deposit base. As at end-September 2010, PB’s statutory liquid-asset ratio stood at 25.10% - above the regulatory minimum of 20%.

As at the same date, PB’s tier-1 and overall risk-weighted capital-adequacy ratios clocked in at 7.02% and 12.35%, respectively. Given the likely state support for the Bank, this level of capitalisation is deemed adequate. Under the circumstances, RAM Ratings Lanka derives comfort from the Government’s continued financial support for PB; the former has injected Rs. 6 billion into the Bank since 2005.