Sri Lanka’s Fitch Revises Pan Asia Banking’s Outlook to Negative; Affirms at ‘BBB(lka)’

May 22, 2015 (LBO) – Sri Lanka’s Fitch Ratings Lanka has revised Sri Lanka-based Pan Asia Banking Corporation PLC’s outlook to negative from stable due to continued deterioration in bank’s capitalisation amid aggressive loan growth.

The full statement reproduced below

Fitch Ratings Lanka has revised Sri Lanka-based Pan Asia Banking Corporation PLC’s (PABC) Outlook to Negative from Stable.
The agency has affirmed PABC’s National Long-Term Rating at ‘BBB(lka)’ and the rating on PABC’s outstanding subordinated debentures at ‘BBB-(lka)’.

The Negative Outlook reflects the continued deterioration in PABC’s capitalisation amid aggressive loan growth. Fitch believes there is a high chance that the bank will not be able to materially increase its capital ratio during 2H15, which would result in a downgrade.

KEY RATING DRIVERS

PABC’s weak capitalisation amid rapid loan book growth has become the most important rating driver. The rating also takes into account the bank’s weak asset quality relative to higher rated peers and moderate franchise.

PABC’s loan book increased by 9.1% qoq in 1Q15 following growth of 27% in 2014, which was above the industry average. The expansion was driven by increased focus on retail and SME customers. Fitch expects PABC to continue to grow faster than its peers.

Fitch sees a high risk that PABC will not meet the Central Bank of Sri Lanka’s minimum Tier 1 capital target of LKR10bn for licensed commercial banks by 1 January 2016. PABC’s Tier 1 capital unadjusted for deductions stood at LKR4.5bn at end-March 2015. Fitch will closely monitor how PABC positions itself to meet this requirement. The bank’s Fitch core capital ratio declined to 8.6% as at end-1Q15 from 9.5% at end-2014 and 10.1% at end-2013.

PABC’s asset quality remains significantly weaker than the industry average, with a reported gross non-performing loan ratio of 6.4% at end-1Q15 after a slight improvement to 5.7% at end-2014 from 8% at end-2013 as a result of lower exposure to pawning. Fitch is of the view that the bank’s aggressive loan growth with greater exposure to retail and SME customer segments, which are more susceptible to economic conditions, could exert pressure on its asset quality.

PABC’s profitability improved, with return on assets of 0.9% in 1Q15 compared with 0.6% in 2014 and 0.2% in 2014. This was largely due to higher net interest margins stemming from re-pricing of deposits and an increase in the current and savings account (CASA) base to 31% of total deposits as at end-1Q15 from 19% at end-2013. PABC will likely find it challenging to maintain a strong CASA base due to its small, but slowly expanding franchise. This, alongside Fitch’s expectation of continued high impairment charges, could continue to put pressure on profitability.

RATING SENSITIVITIES

PABC’s rating would remain at the current level if it is able to significantly and sustainably improve its capitalisation, mostly likely through a timely capital infusion and slower growth in its loan book.

Failure to reverse the trend of capital erosion by end-2015 and to materially enhance its loss absorption buffers would lead to a downgrade.

RATING DRIVERS AND SENSITIVITIES – Subordinated Debt

PABC’s subordinated debentures are rated one notch below PABC’s National Long-Term Rating to reflect their subordination to senior unsecured creditors.

The subordinated debt rating will move in tandem with the issuer’s National Long-Term rating.