RAM Ratings reaffirms AAA/P1 of People’s Bank

RAM Ratings Lanka has reaffirmed the respective long- and short-term financial institution ratings of People’s Bank (“PB” or “the Bank”), at AAA and P1; the long-term rating has a stable outlook.

The ratings are premised on the Bank’s position as the second-largest licensed commercial bank (“LCB”) in Sri Lanka, its healthy funding, good asset quality, financial performance and commendable liquidity as well as its wide-spread geographical reach due to its extensive branch network. Given its systemic importance, PB is likely to enjoy extraordinary support from the Government.

The Bank was incorporated in 1961 under the People’s Bank Act No. 29 of 1961, with the primary objective of developing the cooperative movement in the country through rural banking and agricultural credit. PB is the second-largest LCB in Sri Lanka, accounting for 18.44% of the industry’s assets as at end-December 2010.

The GOSL owns 92.27% of PB. Underscored by the systemic importance derived from its dominant market position, state ownership, significance as a state employer and facilitating role in the government’s long-term macroeconomic objectives, we opine that state support will be readily extended in times of need, both operationally and financially. Since 2005, GOSL has infused Rs 6 billion of equity into the Bank.

Under the PB umbrella, the Bank operates several subsidiaries and associates. That said, the Bank continues to dominate the People’s Bank Group’s (“the Group”) asset base, accounting for 90.58% as at end-December 2010. Its fully-owned subsidiary, People’s Leasing Co PLC (“PLC”), contributes 9.41% of the Group’s assets. Notably, PLC is the largest specialised leasing company (“SLC”) in Sri Lanka in terms of assets.

Apart from SLCs, the Group also has interests in registered finance companies (“RFCs”), insurance, micro-financing, property development, and travelling. However, these subsidiaries are relatively small. The Group’s asset quality is deemed good. Despite catering to a relatively high-risk segment compared to other LCBs, the Group has managed to keep its gross nonperforming-loan (“NPL”) ratio in line with those of its peers.

While the Bank is the biggest NPL contributor to the Group (95%), we note that about a third of these were due to legacy NPLs that have already been adequately provided for.