Fitch affirms Pan Asia Banking Corporation at ‘BBB’/Stable

Wednesday, 25 June 2014 00:00 - - {{hitsCtrl.values.hits}}

Fitch Ratings Lanka has affirmed Pan Asia Banking Corporation PLC’s (PABC) National Long-Term Rating at ‘BBB(lka)’. The Outlook is Stable. The agency has also affirmed PABC’s outstanding subordinated debentures at ‘BBB-(lka)’. Key rating driver PABC’s rating reflects its small but expanding franchise, weak asset quality, declining capitalisation and low profitability relative to higher rated peers. Loan growth at the bank was well below the industry’s as a whole in 2013. Fitch believes that the bank’s new management will seek to accelerate loan growth to meet the bank’s targets for asset growth. PABC’s asset quality weakened sharply, in line with the scenario across the sector, with reported gross non-performing loan ratio of 7.8% as at end-March 2014 (end-2013: 8%), higher than the industry levels. Fitch is of the view that asset quality risks could persist in the bank’s pursuit of growth. Fitch expects the above risks to keep capitalisation under pressure in the absence of fresh capital. PABC’s Fitch core capital ratio, which is lower than its peers’, has steadily decreased to 9.3% as at end-March 2014 from 10.1% at end-2013 and 13.1% at end-2012. PABC’s profitability has been significantly reduced by high impairment charges with return on assets of 0.5% in 1Q14 and 0.19% in 2013. Acquiring and sustaining a strong current and savings account (CASA) base is likely to remain a challenge for PABC due to its modest, albeit slowly expanding franchise. PABC’s current and savings accounts stood at 21% of total deposits as at end-March 2014 and 18% at end-2013. The subordinated debt is rated one notch below the issuer rating to reflect its gone-concern loss-absorption quality in the event of liquidation, in line with Fitch’s criteria for rating such securities. Rating sensitivities The rating could come under pressure if there is a further weakening in its asset quality and capitalisation. An upgrade is unlikely given its capital profile, asset quality and pressure on earnings. The subordinated debt rating will move in tandem with the issuer’s long-term rating.