RAM reaffirms AAA/P1 ratings of People’s Bank

RAM Ratings Lanka has reaffirmed the respective long- and short-term financial institution ratings of People’s 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 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 of Sri Lanka.

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 Government 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, RAM Ratings opines that State support will be readily extended in times of need, both operationally and financially. Since 2005, the Government 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 asset base, accounting for 90.58% as at end-December 2010. Its fully-owned subsidiary, People’s Leasing Co PLC, contributes 9.41% of the Group’s assets. Notably, PLC is the largest specialised leasing company in Sri Lanka in terms of assets.

Apart from SLCs, the Group also has interests in registered finance companies, 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 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. The Group’s gross NPL ratio eased to 4.72% as at end-FYE 31 December 2010, from 6.52% a year earlier, backed by a lower quantum of gross NPLs (Rs. 19.88 billion vs Rs. 21.19 billion as at end-FY Dec 2009). At the same time, PB’s gross NPL ratio had also improved from 6.50% to 4.93% amid fewer new NPLs and better recoveries; the ratio eased further to 4.55% as at end-June 2011.

Meanwhile, the Group’s performance is considered good. Supported by the bank’s lucrative pawn-broking business and PLC’s leasing portfolio, coupled with a low-cost funding base, the Group’s net interest margin has been outperforming its peers’.

That said, the Group’s NIM eased from 5.59% as at end-FY Dec 2010 to 5.28% as at end 1H FY Dec 2011 because its lending rates had been pressured by virtue of it being closely aligned with the Government’s macroeconomic objectives (especially for those related to agriculture and trading), the prevailing competition within the LCB industry and increased reliance on borrowings. Moreover, the bank’s cost-to-income ratio of 70.94% as end-FY

Dec 2010 was higher than those of its peers – a result of its extensive branch network and inflated work force as a State-owned employer. Thanks to the bank’s healthier gross income, however, this ratio had eased to 60.29% by end-1H FY Dec 2011.

On a related note, the Group’s cost-to-income ratio is better than the bank’s owing to its subsidiaries that operate through a relatively low-cost base due to group-wide synergies. The Group achieved pre-tax profits of Rs. 11.39 billion in FY Dec 2010 (FY Dec 2009: Rs. 7.89 billion); of which the bank accounted for the lion’s share of 75.13% while the leasing segment made up another 24.82%.

The Group is perceived to have a healthy funding position. Its funding mix is dominated by customer deposits, which accounted for 77.96% of its total funding requirements as at end-June 2011. Its strong funding base is supported by its extensive branch network and public confidence in its State ownership.

While customer deposits dominated the bank’s funding base accounting for 84.47% during the same period, its loan-to-deposit ratio deteriorated from 71.63% as at end-FY Dec 2009 to 77.32% as at end-FY Dec 2010, premised on the increased reliance on borrowings to fund its strong loan growth. That said, its LD ratio is the best among its peers.

On a separate note, the Group’s liquidity position is viewed to be commendable despite the decline of its statutory liquid-asset ratio to 26.96% as at end-FY Dec 2010 (end-FY Dec 2009: 32.18%) due its aggressive loan growth.

While the bank demonstrated same trends, as at end-June 2011 statutory liquid-asset ratio improved to 26.81% from 23.38% as at end-FY Dec 2010 amid slightly lower loan growth in comparison to the previous period. This ratio is also in line with those of its banking peers. Notably, the Group’s asset-liability maturity mismatch in the ‘less than one year’ bucket improved in fiscal 2010, following the expansion of its pawn-broking portfolio through short-term funding.

Meanwhile, the Group’s capitalisation is viewed to be adequate. Its tier-1 and overall risk weighted capital-adequacy ratio clocked in at 7.45% and 11.57% as at end-June 2011, respectively (end-FY Dec 2010: 8.54% and 12.77%), easing slightly due to its loan growth.

The bank’s tier-1 and overall RWCARs were in line with those of its banking peers, at a respective 7.10% and 11.53% as at end-June 2011 (end-FY Dec 2010: 7.92% and 12.82%). That said, PB’s ratio on net NPLs to shareholders’ funds remained high relative to its peers, at 33.17% as at end-FY Dec 2010 (end-FY Dec 2009: 41.63%).