Fitch affirms PABC’s National Long-term Rating at ‘BBB-(lka)’

Fitch Ratings Lanka has affirmed Pan Asia Banking Corporation PLC’s (PABC) National Long-term rating at ‘BBB-(lka)’.

The agency has also affirmed PABC’s proposed subordinated debenture issue of up to Rs. 150m (which was to take place in 2008) at ‘BB+(lka)’, and simultaneously withdrawn the rating. The Outlook is Stable.

PABC’s rating is constrained by its weak asset quality and consequently high net NPLs/equity ratio. Fitch said that although capital adequacy ratios of the bank remain strong, PABC has yet to meet the Rs. 2.5bn minimum capital requirement imposed on all licensed commercial banks by the regulator-the deadline for which has now been extended to June 2010. PABC operates mainly in the SME customer segments, though in recent years it has also been growing its corporate loan book (about 10 percent of loans at September 2009 compared to about 5 percent at FYE05).

The loan book contracted 11 percent in the nine-month period to end-September (9M09) due to the repayment of a few large facilities towards the end of Q309, and with the bank taking a cautious approach to loan growth amid the prevailing credit environment.

In line with the sector, asset quality weakened considerably in the period FYE07-end-September 2009.

However, the bank stepped up recovery efforts and increased its recovery staff in mid-2009, and Fitch said the reduction in the rate of NPL accretion with the bank’s infection ratio (incremental NPLs/beginning period loans) falling to 2.3 percent in 9M09 (FY08: 4.6 percent). Un-provided NPLs accounted for 49.9 percent of equity at end-9M09 (FYE08:56.5 percent).

Profitability as measured by returns on assets (ROA) improved to 2.5 percent in 9M09 (FY08:1.3 percent), driven largely by marked-to-market gains on PABC’s government securities portfolio; over 80 percent is held for trading. ROA, excluding capital gains, was approximately 1.3 percent in 9M09 which was in line with the licensed commercial bank (LCB) sector.