Fitch Affirms Pan Asia Banking Corp at ‘BBB(lka)’/Stable

Pan Asia Banking Corporation PLC’s National Long-Term rating has been affirmed at ‘BBB(lka)’ by Fitch Ratings Lanka with a Stable Outlook.

PABC’s proposed subordinated debentures of up to Rs. 2 billion also have been affirmed at ‘BBB-(lka)’.

The Rating Agency says PABC’s ratings reflect continued improvements in its credit profile relative to local peers, particularly asset quality and capitalization, supported by structural changes within the bank over 2009-2010.

It says “The ratings also reflect the bank’s small but steadily growing franchise and market share supported by recent branch expansion”.

Following is the full rating release issued by Fitch

Fitch Ratings-Colombo/Singapore-26 October 2011: Fitch Ratings Lanka has affirmed Pan Asia Banking Corporation PLC’s (PABC) National Long-Term rating at ‘BBB(lka)’ with a Stable Outlook. Its proposed subordinated debentures of up to LKR2.0bn have been affirmed at ‘BBB-(lka)’.

PABC’s ratings reflect continued improvements in its credit profile relative to local peers, particularly asset quality and capitalisation, supported by structural changes within the bank over 2009-2010. The ratings also reflect the bank’s small but steadily growing franchise and market share supported by recent branch expansion.

The bank’s credit metrics have moved closer to that of higher-rated peers. Its ratings could be upgraded if it maintains capitalisation and liquidity amid its rapid asset growth as was experienced from 2010 to H111, while also sustaining improvements in asset quality.

PABC’s gross non-performing loan (NPL) ratio of 4.3% at end-September 2011 (end-2010: 5.4%) is in line with higher-rated peers. The improvement in gross NPL ratio is attributed to an absolute decline in NPLs from closer monitoring and recovery efforts, a better credit environment, increased proportion of gold-backed loans (15% of advances), and rapid loan growth in 2010-2011. Fitch notes that PABC’s recent growth should be carefully managed to maintain asset quality at current levels.

PABC’s deposit and loan growth was higher than the sector from 2010 to 2011, supported by branch expansion during the period. Loan growth of 31% in H111 and 85% in 2010 (private commercial bank sector: 25% and 15% respectively) was driven by growth in the bank’s SME and retail segments, with key growth products being overdrafts and gold-backed loans. Although loans/deposits of 91% at June 2011 (average of 82% from 2007 to 2009) was in line with the sector figure of 92%, Fitch notes that the bank’s rapid loan growth has contributed to a lower proportion of liquid assets than peers.

Return on assets increased to 2.3% in H111 (2010: 1.4%) despite net interest margins narrowing to 6.4% from 6.9% in 2010, as the bank better managed its costs. Provision reversals accounted for 0.1% of average assets in H111, compared to a 0.1% provision cost in 2010. Operating cost efficiencies also improved as operating costs fell to 3.8% of average assets in H111 (2010: 4.2%) due to assets generated by new branches. Profitability should continue to benefit from provision reversals in H211 (due to reductions in the statutory general provision) and lower effective taxes.

Although PABC’s Tier 1 capital adequacy ratio (CAR) of 12.2% at end-June 2011 (2010: 14.6%) was stronger than peers’, total CAR fell to 12.7% (2010: 15.3%) due to rapid growth in 2010-2011. Fitch notes that while PABC’s incremental capital generation is supported by high profitability, its total capital base may require strengthening if its current growth momentum on its lending (excluding gold-backed advances) is sustained.

PABC is a licensed commercial bank (LCB), 41% owned by a high net-worth businessman Mr. K.D.D. Perera and related parties. It accounted for 1.1% of LCB sector assets at end-2010 (2009: 0.9%), and had 56 branches at end-September 2011 (end-2009: 35).