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.
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 percent quarter-on-quarter (QoQ) in 1Q15 following growth of 27 percent in 2014, which was above the industry average. The expansion was driven by increased focus on retail and small and medium enterprise (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 I capital target of Rs.10 billion for licensed commercial banks by January 1, 2016. PABC’s Tier I capital unadjusted for deductions stood at Rs.4.5bn 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 percent as at end-1Q15 from 9.5 percent at end-2014 and 10.1 percent 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 percent at end-1Q15 after a slight improvement to 5.7 percent at end-2014 from 8 percent 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 percent in 1Q15 compared with 0.6 percent in 2014 and 0.2 percent 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 percent of total deposits as at end-1Q15 from 19 percent 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.