Fitch rates Pan Asia Banking Corp’s sub debt ‘BBB-’

Fitch Ratings Lanka said yesterday it has assigned Pan Asia Banking Corporation PLC’s (PABC) proposed subordinated debentures of up to LKR2.0bn a National Long- Term rating of ‘BBB-(lka)’.

The issue is rated one notch below PABC’s National Long-Term rating reflecting its debt-like features. The proposed debentures will have a maturity of five years with principal repayment as a bullet payment on maturity. Coupon payments will be semi-annual at a fixed rate and do not contain any deferral clauses. The debentures are to be listed on the Colombo Stock Exchange by way of an introduction.

The subordinated debenture issue is aimed at strengthening PABC’s regulatory Tier 2 capital. Fitch estimates that the bank’s total regulatory capital adequacy ratio (CAR) would increase to about 19% after the issuance given that around LKR1.4bn of the issue amount is eligible for inclusion as Tier II as per the regulatory guidelines. However under Fitch’s criteria, these securities will receive zero equity credit as they do not allow for going-concern loss absorption. As such, further expected strong growth at the bank will result in a weakening of its capitalization, as per the agency’s measures.

Fitch notes that PABC’s total regulatory CAR, which fell to 12.7% by end-June 11 (end-2010:15.3%) driven by its rapid growth, would require further strengthening as the bank continues to expand its portfolio. That said, its core CAR remained strong at 12.2% in end-June 2011 (end-2010: 14.6%) and would be further supported by the bank’s strong profitability during the year.

The ratings reflect PABC’s improved asset quality in relation to its peers, diversity in its loan book and its comfortable capitalisation in relation to its rating category. The bank’s gross non-performing loan (NPL) ratio fell to 4.55% at end-June 11 (end-2010: 5.4%, end-2009: 13.2%) driven by an absolute decline in NPLs and rapid loan growth during the period. This was supported by improvements to underwriting standards from 2009 and the improving macro-economy. PABC’s available capital buffer to meet potential loan losses improved with its net NPLs accounting for 16.5% of equity at end-June 11 (end-2010: 24.2%). Fitch notes however that in view of the bank’s recent high loan growth, NPLs could increase as the loan book seasons. The agency further notes that the bank’s margin trading portfolio, which accounted for 9.5% of advances at end-June 2011 (end-2010: 15%), is vulnerable to fluctuations in the equity market.

PABC’s total advances increased to LKR27.9bn at end-June 11 (end-2009: LKR11.5bn ) driven by rapid growth across all its products - with overdrafts, gold-backed loans, leasing and margin trading being its key growth segments. The bank expanded its network to 51 branches in June 2011, which will support its rapid growth trend over the next year.

PABC is a licensed commercial bank, 41% owned by high net-worth businessman Mr. K.D.D. Perera and related parties.