Fitch affirms BBB-(lka) for Pan Asia Bank

Fitch Ratings has affirmed the National Long-term rating of Pan Asia Banking Corporation PLC (PABC) at 'BBB-(lka)' (BBB minus (lka)).

The rating factors in the bank's improving capitalisation and profitability but remains constrained by the requirement to meet the minimum capital requirement (MCR) set by Central Bank of Sri Lanka (CBSL) by FYE09, its high net NPL/equity ratios and concentrations in its credit portfolio.

The Outlook on the rating remains Stable.

An equity infusion of Rs. 551 million in FY06 and internal capital generation over FY04-FY07 improved capitalisation for PABC (equity was LKR 1.52Bn at Q1 08) as indicated by an equity/assets ratio of 9.3% at FYE07 (9.8% at FYE06, 8.9% at Q1 08); the equity infusion was partly to meet the MCR as set by CBSL.

Thereafter, CBSL increased the MCR for licensed commercial banks in 2006 from Rs. 0.5 billion to Rs. 2.5bn by FYE09, for which PABC's management informs Fitch that its investors are committed to raising the balance equity to meet.

Although sector margins have tightened, PABC's yields on its target market were high and the increased capital in the bank's funding mix enabled its net interest margins to increase to 6.2% in FY07 from 5.3% in FY06 (6.7% annualised in Q1 08).

Furthermore, its ROA increased to 1.5% in FY07 from 1.4% in FY06.