(Repeat for additional subscribers)
June 27 (The following statement was released by the rating agency)
Fitch Ratings Lanka has affirmed People's Merchant Finance PLC 's (PMF) National
Long-Term rating at 'BB+lka'. The Outlook is Stable.
KEY RATING DRIVERS - NATIONAL RATINGS AND SENIOR DEBT
PMF's rating reflects Fitch's expectation that support would be forthcoming from
its main shareholder, state-owned People's Bank (PB; 'AA+(lka)'/Stable), if
required. PB has a 36% effective shareholding in PMF, directly and via PB's
subsidiary People's Leasing & Finance PLC ('AA-(lka)'/Stable). Fitch's view of
support is also based on PMF's association with, and consequent reputational
risk to, PB's franchise given the common brand identity, PB's representation on
PMF's board and support demonstrated by PB in the form of borrowings and equity
injections. Nevertheless, there is a multiple notch differential between PMF's
and PB's ratings, taking into account PMF's relatively less important role in
and lower integration with the group's overall operations.
RATING SENSITIVITIES- NATIONAL RATINGS AND SENIOR DEBT
PMF's rating may be downgraded if there is any change to PB's ability or
propensity to extend support. This may stem from a change to PB's National
Long-Term Rating or a material weakening of linkages with PB, such as a dilution
of PB's effective shareholding or board control.
PMF's standalone profile is very weak and characterised by continuing operating
losses, deteriorating asset quality, and a thin loss-absorption capacity.
The company made a pre- impairment operating loss of LKR6.7m in FY14 as a result
of lower net interest margins and high operating costs. PMF also incurred
significant loan impairment charges of 3% of average loans in FY14. This stemmed
from a further weakening of PMF's asset quality along with a challenging
macroeconomic environment, which has affected its largely subprime customer
base. Fitch believes that PMF's loan book could face further asset quality
stress unless risk management is strengthened.
PMF's funding is predominantly from term deposits, which, although improving,
remains concentrated. Fitch expects liquidity support from PB to be forthcoming
Fitch believes that PMF is likely to be merged or acquired as a part of the
Government of Sri Lanka's 'Master Plan' to consolidate the financial system.