Sri Lanka’s Fitch Revises Pan Asia Banking’s Outlook to Negative; Affirms at ‘BBB(lka)’

May 22, 2015 (LBO) – Sri Lanka’s Fitch Ratings Lanka has revised Sri Lanka-based Pan Asia Banking Corporation PLC’s outlook to negative from stable due to continued deterioration in bank’s capitalisation amid aggressive loan growth.

The full statement reproduced below

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.

KEY RATING DRIVERS

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% qoq in 1Q15 following growth of 27% in 2014, which was above the industry average. The expansion was driven by increased focus on retail and 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 1 capital target of LKR10bn for licensed commercial banks by 1 January 2016. PABC’s Tier 1 capital unadjusted for deductions stood at LKR4.5bn 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% as at end-1Q15 from 9.5% at end-2014 and 10.1% 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% at end-1Q15 after a slight improvement to 5.7% at end-2014 from 8% 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% in 1Q15 compared with 0.6% in 2014 and 0.2% 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% of total deposits as at end-1Q15 from 19% 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.

RATING SENSITIVITIES

PABC’s rating would remain at the current level if it is able to significantly and sustainably improve its capitalisation, mostly likely through a timely capital infusion and slower growth in its loan book.

Failure to reverse the trend of capital erosion by end-2015 and to materially enhance its loss absorption buffers would lead to a downgrade.

RATING DRIVERS AND SENSITIVITIES – Subordinated Debt

PABC’s subordinated debentures are rated one notch below PABC’s National Long-Term Rating to reflect their subordination to senior unsecured creditors.

The subordinated debt rating will move in tandem with the issuer’s National Long-Term rating.

EPF lost over one billion rupees on investments in 2013: PAC

By Chandani Kirinde

Ex-Central Bank Governor gives long gestation projects, volatile share market as reasons

In envestment of funds from the Employees Provident Fund – monies meant to provide social security to workers – caused a loss of over one billion rupees, the Public Accounts Committee (PAC) has revealed. The financial watchdog of Parliament noted that the man responsible for those investments, the former Governor of the Central Bank has given different explanations.

The loss on investment was recorded in 2013. The Central Bank’s former Governor Ajith Nivard Cabraal who appeared before the Committee when the EPF accounts were under scrutiny had stated that those investments would certainly bring value in the long run. The report also noted that the EPF had not made any income from the investment of Rs. 500 million in SriLankan Airlines in 2010.

Mr. Cabraal has said in reply that it would take five to ten years to earn a profit from the investment made in SriLankan Airlines as it is a long term investment.
When queried by the Committee as to why the EPF had been unable to gain a profit from an investment of over Rs. 205 million in the share market, Mr. Cabraal had stated that the fluctuations in the prices of shares is the main reason for it.

The Committee which inquired into the current position of the Internal Audit Unit of the EPF considering the fact that nearly one trillion rupees is controlled by it found that there are only eight officers attached to this Unit due to cadre resections and they had to cover 60 district offices including sub offices. Steps have since been taken to computerise the EPF system so that there would be better control over its financial management.

The committee also found that there was a delay in releasing claims to members or their beneficiaries with the balance of non-settled accounts standing at over Rs. 120 million and non-claimed beneficiaries accounts at over Rs. 13 million. The Public Accounts Committee also questioned what action had been taken against the Board of Directors of the Janatha Estates Development Board (JEDB) for misusing the money released by the Treasury to settle the EPF arrears of JEDB workers.

The Chief Accounting Officer of the EPF had informed that it was found that the directors were personally responsible for the non- payment of EPF dues and when questions were raised the Board members had resigned. The PAC headed by Higher Education Minister Dr. Sarath Amunugama probed the accounts, between January 2013 and October 2013, of 43 State institutions and its findings were included in this report.
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Pan Asia Bank doubles 1Q’15 net profits to Rs.177 mn

Pan Asia Banking Corporation PLC (PABC) has posted a net profit of Rs.177 million for the quarter ended March 31, 2015 (1Q’15), up 106 per cent from a year earlier.

The growth in the profit before tax was 231 per cent year-on-year (yoy) to Rs. 270.2 million, the bank said in a media release.

The bank has been able to record this commendable performance due to the growth of its loan book coupled with expanding net interest margin. This has also been amply assisted by the cost discipline demonstrated throughout in delivering its services. Pan Asia Bank closed the 2014 financial year expanding its loan book by 34 per cent, among the highest credit growths by a licensed commercial banks in the country, which continued to 1Q’15 as well, the release said.

Commenting on the first quarter performance, the bank’s Director and CEO, Dimantha Seneviratne said the first quarter performance of the bank is a testament to its prudent management strategies in sustainable asset growth and cost management that provides an ideal platform to reach its financial and other targets set for the remainder of 2015. www.sundaytimes.lk