Fitch affirms national rating of People’s Bank at ‘A-(lka)’

Fitch Ratings Lanka has affirmed the National Long-term rating of People’s Bank (Sri Lanka) (PB) at ‘A-(lka)’ (A minus(lka)) reflecting the expected level of support available from the Government of Sri Lanka (GOSL) due to its state ownership, systemic significance and strategic importance to the state. As such, Fitch has also affirmed PB’s Support Rating at ‘4’.

Despite capital infusions and significantly improved profitability, the equity position of the bank is still weak and inadequate in meeting regulatory capital adequacy ratios, which is reflected by the affirmed Individual Rating of ‘E’.

The outlook on the rating remains Positive.

In spite of PB’s financial profile improving commendably during FY06, internal capital generation was hampered due to special levy payments (de facto dividends) to GOSL (Rs 600 million in FY06), high effective taxation (51.4% in FY06) and a high cost structure (cost-to-income ratio of 66.8% in FY06).

A capital infusion plan (up to a total of Rs. 5 billion) by GOSL, and backed by a conditional credit line by the Asian Development Bank (ADB), brought in the first tranche of Rs 2.0bn in FY05.

The GOSL in FY06 was compelled to fund the second tranche of Rs. 1.0bn on its own since the conditions and financial sector reforms, as stipulated by the ADB, were not met by GOSL.

The Ministry of Finance (MOF) has now expressed its intention to the bank in writing, to a recapitalisation as per the originally envisaged plan.

Accordingly, the third tranche of Rs 2.0bn due in FY07 is to be infused in two equal instalments in October 2007 and December 2007, with the final tranche of Rs 1.5bn expected to be infused in FY08.

As at FYE06, the bank was Rs 5.2bn short of meeting CAR requirements at the bank level.