People’s Merchant Bank’s (PMB) weakened financial profile in terms of profitability, asset quality and solvency prompted a ratings downgrade from Fitch Ratings Lanka this week.
The agency removed the bank’s National Long-term rating from Rating Watch Negative (RWN) and downgraded the rating to 'BB+(lka)' from 'BBB-(lka)'. The agency simultaneously assigned a Negative Outlook. In a press release, Fitch noted that it takes comfort in the bank’s main shareholder, the state-owned People's Bank (Sri Lanka) (PB; A(lka)/Stable), which holds 39% of PMB equity and has board level linkages with PB.
In support of the government's initiative to aid liquidity-stressed financial institutions, PMB acquired the business operations and selected assets and liabilities of ABC Credit Card Company Ltd (ABC), an unregulated company which issued credit cards and accepted deposits, in March 2009. This was carried out through PMB Credit Card Company Ltd (PMBCC), which is a 100% owned subsidiary of PMB incorporated for this purpose.
Through PMBCC, PMB made another acquisition in June 2009 (Q110), acquiring Silvereen Finance Company Ltd (SFC), a small family-held registered finance company (RFC). SFC was renamed People's Merchant Finance Company Ltd (PMF), which is now a 99.9%-owned subsidiary of PMB. PMB is currently awaiting approval from the Central Bank of Sri Lanka to merge with PMF, and thereby become a RFC. PMB's investment in subsidiaries accounted for 11% of the company's assets as at Q310.
Fitch states that PMB's gross non-performing loan (NPL) ratio rose sharply to 29.2% at Q310 (FYE09:12.6%), stemming mainly from a significant increase in delinquencies in its loan portfolio. The gross NPL ratio for the group stood at 31.2% at Q310, which was compounded by the poor asset quality of its subsidiary, PMF. Fitch notes that PMB's NPL’s continued to increase into Q410, The agency's view is that asset quality will remain weak for the non- bank financial institution sector in Sri Lanka. The company incurred losses of Rs.20 million in Q310, mainly due to depressed interest income. The group's losses for the same period were Rs.107 million, mainly reflecting the losses at PMBCC.