The rating also reflects PLC’s good access to institutional funding, underpinned by the strength of its parent, People’s Bank (PB), which is rated ‘A(lka)’/Stable.
Fitch Ratings said it also believes the cyclical weakening of PLC's asset quality since 2007, which is in line with peers, should reverse over the medium term.
PLC accounted for over 23 percent of Sri Lanka’s specialized leasing company sector assets at end-March 2009.
"The deterioration in PLC’s asset quality showed signs of easing in the quarter ending 30 September 2009 (Q210), subsequent to a peak in June 2009," Fitch said.
"Fitch expects the current improving trend to continue, as the local economy recovers from a high inflation, high interest rate environment that prevailed over the 24 months to end-December 2008."
While improvements in PLC's monitoring and collection mechanism made in the recent past could speed up recovery, Fitch said it expects the company’s NPLs (non-performing loans) to remain high compared with its historical best at least through 2010, similar to the sector.
Return on assets improved to an annualised 3.74 percent at end-September 2009 from a low of 2.75 percent at end-June 2009, Fitch said.
This was because widening net interest margins outstripped credit costs and the NPL drag on interest yields in the present falling market interest rate environment.
"Despite the improving trend, PLC’s ROA could remain lower than pre-FY08 levels in 2010, dampened by credit costs and the NPL drag."
People's Leasing acquired a 97 percent stake in People’s Leasing Finance, formerly Seylan Merchant Leasing, which was part of the troubled Ceylinco group, in July 2009. People's Leasing Finance is licensed as a registered finance company, and is able to acquire public deposits.
"This should benefit PLC’s consolidated profile by improving funding diversity and lowering the average cost of borrowings in the medium term," Fitch Ratings said.
It said it considered direct state support unlikely, given PLC’s low systemic importance.
"However, in Fitch’s view, support from PB could be forthcoming if required, given its 100 percent ownership of PLC, the common brand name and PLC’s significant contribution to its parent’s profits"
PLC contributed 21.5 percent of the parent bank's profits as at December 2008.
Fitch said that rating "upgrade triggers" include greater funding diversity at a group level - measured by the proportion of deposit-funded assets, or greater operational integration with its parent.
An upgrade of PLC’s rating could also occur if PB’s rating is upgraded, to reflect the parent’s improved ability to support PL.
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