Rs 600 mn to government coffers from People’s Bank

Fitch Ratings Lanka this week affirmed the National Long-term rating of People's Bank (PB) at 'A-(lka)' (A minus(lka)) reflecting “the expected level of support available from the government due to its state ownership, systemic significance and strategic importance to the state.”

But Fitch said that despite capital infusions and significantly improved profitability, the equity position of the bank is still weak and inadequate in meeting regulatory capital adequacy ratios. The outlook on the rating remains ‘positive’, it said.

In spite of PB's financial profile improving commendably during FY06, internal capital generation was hampered due to special levy payments (de facto dividends) to the government (Rs 600 million in FY06), high effective taxation (51.4% in FY06) and a high cost structure (cost-to-income ratio of 66.8% in FY06). A capital infusion plan (up to a total of Rs 6.5 billion) by the government and backed by a conditional credit line by the ADB brought in the first tranche of Rs. 2 billion in FY05.

“The government in FY06 was compelled to fund the second tranche of Rs 1 billion on its own since the conditions and financial sector reforms, as stipulated by the ADB, were not met by the government. The Ministry of Finance has now expressed its intention to the bank in writing, to a recapitalisation as per the originally envisaged plan. Accordingly, the third tranche of Rs 2 billion due in FY07 is to be infused in two equal instalments in October 2007 and December 2007 with the final tranche of Rs 1.5 billion expected to be infused in FY08,” Fitch said.