Fitch Affirms Pradeshiya Sanwardhana Bank at 'BBB+(lka)'/Stable

Thu Jul 24, 2014 9:41am EDT

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(The following statement was released by the rating agency) COLOMBO, July 24 (Fitch) Fitch Ratings Lanka has affirmed Pradeshiya Sanwardhana Bank's (PSB) National Long Term Rating at 'BBB+(lka)'. The Outlook is Stable. KEY RATING DRIVERS PSB's rating is notched off Sri Lanka's sovereign rating (BB-/Stable) as Fitch expects the government to provide extraordinary support to the bank in case of need. This is based on PSB's mandate to support the government's policy on rural development by granting financial assistance to microfinance institutions and small and medium enterprises. The rating also captures the government's 100% effective ownership of PSB. The notching difference takes into account that the bank performs a rather narrow policy role that could quite easily be performed by another entity. While PSB is subject to separate legislation, it does not offer specific protection for creditors. Its main funding source is deposits from target customers which, despite forming a small domestic market share of just about 1% of system-wide deposits, makes it systemically important, in Fitch's view. RATING SENSITIVITIES PSB's rating is sensitive to changes in the state's ability and propensity to provide support. A significant deviation in lending and borrowing away from the core microfinance segment could diminish its policy role and result in a downgrade. Conversely, stronger linkages to the state through for example funding guarantees and a broader policy role could lead to an upgrade. PSB is a licensed specialised bank governed by the Pradeshiya Sanwardhana Bank Act No. 41 of 2008. The governing act defines the bank's objective to facilitate regional economic development in Sri Lanka by promoting certain sectors such as agriculture, industry, trade and livestock. Fitch considers the Sri Lankan central bank's intention to keep PSB as a standalone entity to further growth in the microfinance sector as an affirmation of its policy role and its importance to the government. This is in contrast to other smaller state banks, which the authorities have ordered to consolidate as part of the master plan for the financial sector. In line with its mandate the bank's loan exposure has thus far predominantly been directed towards agriculture and SMEs in rural areas. The loan concentration is low, reflecting the granular nature of microfinance lending. PSB is now focusing on relatively larger size SME lending in order to expand its loan book. PSB's intrinsic strength is weak, and with its policy role, management may not purely follow commercial considerations. The total capital ratio was just above the regulatory minimum of 10% at 10.44% at end-March 2014. The capital ratio has deteriorated due to decreasing profits that have been squeezed by rapid loan deterioration and high directed dividend pay-outs. Reported regulatory non-performing loans (NPLs) increased significantly to 10.95% at end-March 2014 from 7.3% at end-March 2013 due to substantial delinquencies in pawning and agriculture-related exposures stemming from adverse weather conditions. Provisions for impaired loans covered only about a third of the regulatory NPLs at end-2013. Contacts: Primary Analyst Nayantara Bandaranayake, Analyst +941 1254 1900 Fitch Ratings Lanka Limited 15-04, East Tower, World Trade Center Colombo 01, Sri Lanka Secondary Analyst Dilranie Mudannayake Analyst +94 1 1254 1900 Committee Chairperson Sabine Bauer Senior Director +852 2263 9966 Media Relations: Bindu Menon, Mumbai, Tel: +91 22 4000 1727, Email: Note to editors: Fitch's National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated 'AAA' and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as 'AAA(lka)' for National ratings in Sri Lanka. Specific letter grades are not therefore internationally comparable. Additional information is available at Applicable criteria, "Global Financial Institutions Criteria", dated 31 January 2014, "National Scale Ratings Criteria", dated 30 October 2013, and "Evaluating Corporate Governance", dated 12 December 2012 are available at Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here National Scale Ratings Criteria here Evaluating Corporate Governance here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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