"PABC's capital is weak as indicated by its low equity to assets ratio of 3.8 percent as at August '05, and likely equity erosion due to its non-performing loans (NPL) and poor provision cover," Fitch said in a report while reaffirming the bank's rating.
"This ratio is among the lowest for banks in the system," Fitch said.
In late 2003, PABC raised Rs. 100 million in equity and Rs. 254 million in subordinate debentures. The combined equity and debt issues enabled PABC to maintain its capital adequacy ratio (CAR) above the regulatory threshold of 10 percent.
Poor profitability has also dragged down capital expansion. The reported equity to assets ratio declined to 4.8 percent at end June '05 (over 5.1 percent during financial year '03).
The equity position could erode further if the bank adopted a more conservative provisioning policy.
"If provision coverage was increased to cover 75 percent of NPL's in the 'loss' category and 50 percent cover in the remaining NPL's (and the identified weak loans) PABC's equity base (at end Aug '05) would fall sharply to Rs. 121million with a total estimated capital shortfall of around Rs. 151 million in order to meet minimum regulatory capital requirements."
Despite the weak equity position, PABC's reported total capital adequacy ratio was 11.5 percent as at June '05 (it was 13.9 percent in 2004).
Given the limitations in internally generated capital, Fitch views a significant capital infusion as crucial to accommodate meaningful NPL workout and support loan growth.
"The rating outlook is stable. However a downward revision of its rating is likely in the event PABC's capital or solvency position weakens further," Fitch said.
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