Fitch affirms People’s Bank at ‘AA+’, Outlook stable
Friday, 28 June 2013 09:40
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Fitch Ratings said yesterday it has affirmed People’s Bank’s (PB) National Long-Term rating at ‘AA+(lka)’. The Outlook is Stable.
PB’s National Long-term rating is driven by Fitch’s expectations of the Government of Sri Lanka’s (BB-/Stable) high propensity but limited ability to provide support to the bank under extreme circumstances.
The State’s high propensity for support stems from PB’s high systemic importance as the second-largest bank in the country, accounting for nearly 20% of domestic banking system assets in 2012. It also takes into account its quasi-sovereign status, its role as a key lender to the Government and full Government ownership. The State’s limited ability to provide extraordinary support stems from its own fiscal limitations, as reflected in its ‘BB-’/Stable rating.
Fitch views PB’s standalone rating as being weaker than the support-driven ‘AA+(lka)’ level.
This is due to the bank’s lower capitalisation than its peers, its high credit concentrations, particularly to state-owned enterprises (SOEs), and its high exposure to gold-price volatility (through pawning loans) notwithstanding the reasonable collateral buffer maintained against these loans. These risks are counterbalanced by PB’s strong deposit franchise, which is supported by its extensive branch network and its strong association with the state.
PB has a strong domestic deposit franchise as reflected in a market share of 19% of deposits at end-2012. PB also has the highest mix of current- and savings accounts ratio (CASA) among domestic banks (2012: 45% of deposits), which reflects its mature franchise and the perceived safety of state banks. Wholesale deposits from the state and SOEs only amounted to 9% of deposits.
PB’s significant exposure to the state and SOEs (2012: 32% of assets; 2011: 26%) is not expected to reduce given the bank’s strong links with its shareholder. At end-2012 the five largest on-balance sheet exposures amounted to a high 219% of the bank’s equity.
The two largest State-borrowers – the Ceylon Electricity Board (CEB) and the Ceylon Petroleum Corporation (CPC) – have collection accounts with the bank through which consumer/wholesale payments are routed. These cash flows are used to service the loans prior to the remainder being released to CEB and CPC. This reduces liquidity risk to a large extent.
While a majority of SOE exposures are guaranteed by the State, receivables equivalent to 88% of PB’s equity do not carry state guarantees.
PB’s capitalisation, measured in terms of its core tier 1 regulatory capital adequacy ratio (CAR, 2012: 9.8%) is weaker than private-sector commercial banks in the ‘AA(lka)’category, despite having a large state and SOE exposure that is excluded from regulatory CAR computation. PB’s core tier 1 CAR is reduced further to 8% when the bank’s exposure to pawning loans, which is also omitted from CAR computations, is adjusted for 25% potential losses in a hypothetical scenario of severe stress. However PB’s core tier 1 CAR is above the minimum domestic regulatory threshold of 5%.
PB’s exposure to pawning loans was high at 37% at end-March 2013. However the bank reported an average loan-to-value ratio of 68% for the pawing portfolio, which is lower than most peers’, and reduces the risk to PB’s capital from significant gold-price volatility. The fact that over 70% of pawning loans are, in effect, working capital lending to the agricultural sector also reduces credit risk in the event of a drop in gold prices as these loans are not speculative by nature. The bank expects to cut its pawning exposure by end-2013.
Changes to the State’s ability, as well as the agency’s perception of the State’s willingness to provide support, will result in changes to the bank’s rating. An upgrade of the National Long-Term rating could stem from a demonstration of preferential support for PB.
PB is the largest domestic bank in terms of deposits, and has the second-largest share of loans (2012: 23% of loans). PB is 99.9%-owned by the State and has an extensive branch network of over 728 outlets and service centres. Apart from credit concentrations to the State, the bank has a high retail and SME mix in its loan portfolio, and is the market leader in pawning loans and leasing - the latter disbursed mainly through its subsidiary People’s Leasing & Finance PLC (B+/AA-(lka)/Stable).
Further details on PB are available on www.fitchratings.com and www.fitchratings.lk.
