Fitch upgrades People’s Bank to ‘AA’

Fitch Ratings Lanka has upgraded People’s Bank’s (PB) National Long-Term rating to ‘AA(lka)’ from ‘AA-(lka)’. The Outlook is Stable.

The upgrade reflects Fitch’s view of the Government’s increased capacity to support PB, if required, as indicated by the upgrade of Sri Lanka’s Issuer Default Rating to ‘BB-’ in July 2011 (for more information, please refer to the rating action commentary, published on 18 July 2011).

The rating reflect Fitch’s expectation of Government support, underpinned by the bank’s increasing importance to the State post-war, systemic importance to the wider banking sector, and its state ownership. However, Fitch views the probability of support to be moderate.

As PB’s ratings are driven by expectations of State support, a change to Sri Lanka’s sovereign rating may change PB’s ratings.

An upgrade may also result from a demonstration of preferential support to the bank relative to other State banks or PB’s increased alignment with the Government’s policy framework such that it operates as an effective organ of the government and is an integral part of the apparatus of the State.

The bank’s State sector exposures (Government and State-owned entities) accounted for 20% at H111 (23% at 2010), with many of these exposures featuring in PB’s 20 largest exposures. Fitch expects these to remain high given PB’s strong linkage to the state sector.

PB’s return on assets (ROA) of 1.9% at H111 (annualised; 2010: 1.2%, 2009: 0.9%) was higher than most ‘AA(lka)’-rated peers. This is attributed to the bank’s strong net interest margins (NIMs) of 5.8% in H111 (2010: 6.1%) – a function of its loan mix, which compared well with the sector. PB’s cost/average assets improved to 3.2% at H111 (annualised) from 3.5% at 2010 (2009: 4.0%), which also compared well with the sector.

PB’s tier 1 and equity/assets ratio (H111: 7.5% and 4.4% respectively) remained lower than peers, with capital augmentation driven by internally generated capital. The bank’s exposures to State and gold-backed loans (pawning loans) together accounted for 58% of total loans at H111 (2010: 59%). PB’s capital adequacy ratio has benefited from these zero-weighted loans.

Gross non-performing loan (NPL) ratio declined to 4.0% at H111 from 4.8% at end-2010 (consolidated group figures) mainly driven by concerted recoveries of both legacy NPLs and overall robust loan growth in a post-war economic upturn.

Gross NPL ratio adjusted for State sector exposures also improved to 4.8% at H111 (2010: 6.0%). In addition, the bank’s net NPL/loans figure was healthy in the local context at 0.6% at H111 (2010: 0.9%).

PB is the second-largest bank in the system (15.4% banking sector assets at 2010) and 99.9% owned by GOSL. It has an extensive network of 330 branches. The PB group includes People’s Leasing Company Ltd. (‘A(lka)’/Stable), which carries out most of the group’s leasing business.