Financial Times - Fitch Lanka assigns national rating to People's Merchant Bank Ltd

Fitch Ratings Lanka last week assigned a National Long-term Issuer rating of 'BBB-(lka)' (BBB minus(lka)) to People's Merchant Bank Ltd. ("PMB"), a rating which has a stable outlook.

The rating reflects the potential support from its shareholders particularly People's Bank (rated 'A-(lka)' (A minus(lka)), which currently owns 39% of PMB's shares and extends financial support as well as the usage of a common brand. Other key rating considerations include PMB's conservative management, its sound systems and procedures, its relatively strong operational indicators (profitability, asset quality and capitalisation), and the existence of a reasonably good risk management framework.

“Nonetheless, PMB's rating was constrained by its small size of operations. As such, 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,” the Fitch statement said.

Although PMB is a listed merchant bank, its fee-based activities were limited, with over 80% of income generated by its fund-based activities, which consisted mainly of vehicle financing (leasing and hire purchase). Vehicle financing, loans extended to its existing leasing clientele, property development and bills of exchange accounted for 73%, 12%, 7% and 8%, respectively, of PMB's loan book as at December 2005. The agency notes that the bank's exposure to property development will add some volatility to earnings due to bulkiness when disposing of real estate stock.

The bank's ROA was relatively good at an annualised 4.1% for the nine months ended December 2005 (versus 4.2% in FY05). Though its loan book yields have begun to decline due to competition, PMB's margins remained relatively good at an annualised 9.4% for the same period.

PMB's asset quality was reasonably good with gross non performing loans ("NPL")/loans at 9.6% as at March 2006 (11.6% 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% of NPLs as at December 2005 vis-a-vis 57.3% as at March 2004, the statement added.

PMB's capital position declined in the nine months to December 2005 due to asset growth, with the equity/assets ratio declining to 19.3% at December 2005 (23.6% as at March 2005). Meanwhile, the net NPL/equity ratio remained moderate at 33.4% as at December 2005 due to recent NPL accretion. Dividend payout was 84% of net income in FY05 and Fitch notes that a continuation of such a policy will hamper capital formation going forward especially in light of the recent high effective tax rates.