June 26, 2006 (LBO) – Fitch Ratings Lanka on Monday assigned a ‘BBB-(lka)’ rating for People’s Merchant Bank’s long-term debt, citing its parental backing and conservative management techniques, as a reason for it. “The rating reflects the potential support from its shareholders particularly People’s Bank (rated ‘A-(lka)’, which currently owns 39.0 percent of PMBs shares and extends financial support as well as the usage of a common brand,” the agency said.
However, Fitch cautioned against the firm’s high dividend policy. PMB paid out 84.0 percent of their net income last year by way of dividends.
“A continuation of such a policy will hamper capital formation going forward especially in light of the recent high effective tax rates,” warns Fitch.
While the rating outlook is stable, a ‘BBB-(lka)’ means there is adequate capacity to meet financial commitments, but the rating could be affected by external events.
PMBs small size also constrains its rating. “PMB would likely see upward pressure on its ratings if it managed to boost its scale of operations significantly while retaining its existing strength in its operational indicators.”
A quoted merchant bank, PMBs fee-based activities are limited with over 80 percent of income generated by fund-based activities – mainly vehicle financing (leasing and hire purchase).
PMBs loan book as at December 2005 comprises of:
â€¢ Vehicle financing (73.0 percent)
â€¢ Loans extended to its existing leasing clientele (12.0 percent)
â€¢ Property development (7.0 percent)
â€¢ Bills of exchange accounted (8.0 percent)
The bank’s exposure to property development will add some volatility to earnings due to bulkiness when it comes to selling off real estate stock, Fitch said.
The bank’s return on assets (ROA) was relatively good at an annualised 4.1 percent for the nine months ended December 2005 (versus 4.2 percent in FY05).
Though competition has put loan book yields under pressure, PMBs margins remain relatively good at an annualised 9.4 percent for the same period.
Looking ahead, PMBs margins are expected to remain healthy although narrow further due to competition.
PMBs asset quality was reasonably good with gross non performing loans (‘NPL’)/loans at 9.6 percent as at March 2006 (11.6 percent as at March 2005).
Given that the bulk of NPLs were in arrears in the ‘three to six’ month category, provision cover dropped to 37.5 percent of NPLs as at December 2005 vis-a-vis 57.3 percent as at March 2004.
Around 62.0 percent of PMBs funding was short-to-medium term borrowings, which on the whole are re-priced annually.
Nonetheless, PMB had positive maturity gaps in every maturity bucket for both FY04 and FY05.
PMBs capital position declined in the nine months to December 2005 due to asset growth, with the equity/assets ratio declining to 19.3 percent at December 2005 (23.6 percent as at March 2005).
The net NPL/equity ratio remained moderate at 33.4 percent as at December 2005 due to recent NPL accretion. Set up in 1983, nearly 60 percent of PMBs voting stock is held by People’s Bank and DPMC Financial Services Ltd. The rest is held by institutions and the general public.