Fitch Affirms People’s Merchant at ‘BB+’/Stable

Fitch Ratings Lanka has affirmed Sri Lanka’s People’s Merchant PLC’s (PMP) National Long-Term rating at ‘BB+(lka)’. The Outlook is Stable.

The rating reflects implied support that Fitch expects would be forthcoming from its main shareholder, state-owned People’s Bank (PB; ‘AA(lka)’/Stable), if required, and its weak standalone financial profile.

PB has a 36% effective shareholding in PMP, directly and via PB’s subsidiary People’s Leasing PLC (‘A+(lka)’/Stable). Fitch’s view of support is also based on PMP’s association with, and consequent reputational risk to, PB’s franchise given the common brand identity and PB’s representation on PMP’s board.

PMP’s profitability, measured by return on assets (ROA), was 0.44% excluding non-recurring items, as at end-9MFY12 (end December 2011) which, although an improvement from a negative 0.43% at FYE11, remains weaker than that of similarly rated peers.

PMP’s equity to assets increased to 32.5% at end-9MFY12 from 12.7% at FYE11, following a rights issue of Rs. 450 m in November 2011. Fitch expects capitalisation to remain healthy, provided it is not diluted by aggressive growth.

Net (unprovided for) three-month non-performing advances (NPAs) to equity improved to 35.5% as of end-9MFY12 from 81.8% in FY11 and net six-month NPAs improved to 28.3% from 63.3% on account of equity increase and a reduction in absolute NPA levels.

Fitch notes large maturity mismatches between interest rate-sensitive assets and liabilities point to a refinancing requirement in Q4FY12. Management indicates that options for funding this gap through further credit lines from banks are being explored. However, Fitch expects adequate liquidity support from PB would be forthcoming should it be required. Management has also indicated that measures are being taken to diversify the funding base.

PMP’s asset quality remains weak when compared with rated peers with three-month gross NPAs at 20.6% and six-month gross NPAs at 17.6% as at end-9MFY12 (versus Fitch rated peer averages of 19.3% and 4.8% respectively at end September 2011). Fitch expects asset quality to remain weak, despite reduced NPAs on account of greater recovery efforts.

This is because of high NPAs in term loans (62% of over three-month NPAs) that are relatively more difficult to recover.Any changes in Fitch’s assessment of PB’s ability and willingness to support PMP may trigger a rating action.

 Substantial and sustained improvements in PMP’s standalone financial profile in terms of asset quality, solvency, and profitability while maintaining healthy capitalisation, may lead to positive rating action. Conversely, a further deterioration in the company’s profitability and/or deterioration in its asset quality and solvency may result in a negative rating action.