Given its systemic importance, PB is likely to enjoy extraordinary support from the Government of Sri Lanka.
The Bank was incorporated with the primary objective of developing the cooperative movement in the country through rural banking and agricultural credit and is currently the second-largest LCB in Sri Lanka, accounting for 18.55% of the LCB industry’s assets as at end-December 2011. Underscored by the systemic importance derived from its dominant market position, state ownership of 92.27%, significance as a state employer and facilitating role in the government’s long-term macroeconomic objectives, we opine that state support will be readily forthcoming in times of need, both operationally and financially; this is reflected by the track record of support historically.
Within the PB umbrella, the Bank operates several subsidiaries and associated companies. That said, PB continues to dominate the People’s Bank Group’s asset base, accounting for 88% as at end-December 2011. Its fully-owned subsidiary, People’s Leasing Co PLC (PLC), contributes 10.02% of the Group’s assets and is the largest specialised leasing company in Sri Lanka in terms of assets. The Group also has interests in licensed finance companies, insurance, micro-financing, property development and travel. However, these businesses are relatively small.
We deem the Group’s asset quality to be above average. Its loan portfolio is dominated by the Bank which had a share of 88.47% as at FYE 31 December 2011.
Meanwhile, 39.09% of PB’s loan assets comprise pawning loans that are fully-backed by gold, which is easily liquefiable. Moreover, a loan growth of 32.49% year-on-year in FY Dec 2011 coupled with a lower quantum of gross non-performing loans and improved recoveries at both PB and PLC levels led the Group’s gross NPL ratio to improve to 3.06% as at end-FY Dec 2011 from 4.72% a year earlier, in line with peers’. Although the Group’s unseasoned portfolio is a concern, this is somewhat mitigated by the fact that 50.33% of its portfolio expansion in fiscal 2011 had stemmed from low-risk pawning facilities. On this note, although pawn-broking has low delinquency rates, it is exposed to the risk of fluctuating gold prices. We observe that in this regard, PB maintains a loan-to-value ratio of around 70%, which provides some buffer against price reductions.
The Group’s financial performance is deemed good. Backed by both PB’s lucrative pawning portfolio and PLC’s higher-yielding leasing portfolio, the Group’s net interest margins of 5.45% in FY Dec 2011 was higher than that of the Bank, surpassing peers’. The Group’s efforts to cut down overheads had also borne fruit; its historically high cost-to-income ratio had improved and was better than the Bank’s and peers’, as its subsidiaries operate through a relatively low-cost base due to group-wide synergies. The Group’s pre-tax profit almost doubled to LKR 20.97 billion in FY Dec 2011 (FY Dec 2010: LKR 11.39 billion); the Bank accounted for a lion’s share of 73.01% while the leasing arm made up 28.53%.
RAM Ratings Lanka opines that the Group has a healthy funding profile owing to a strong franchise through state-ownership and an extensive branch reach. This has resulted in a deposit-dominated funding structure at both the Group and the Bank level. Elsewhere, as a SLC, PLC cannot accept public deposits, hence the Group had more exposure to debt compared to the Bank The Bank’s loan-to-deposit ratio had increased in fiscal 2011 as a result of stronger loan growth, but was still better than peers’.
On a separate note, PB’s liquidity is viewed to be average; its statutory liquid-asset ratio stood at 21.48% as at end-FY Dec 2011, before moderating slightly at end-March 2012 amid loan growth. The ratio remains broadly in line with peers’.
The Group’s capitalisation is deemed adequate. Its tier-1 and overall risk-weighted capital adequacy ratios clocked in at 11.88% and 16.19%, respectively as at end-March 2012. PB’s tier-1 and overall RWCAR improved during the same period amid strong internal capital-generation, despite loan growth; the ratios have surpassed the peers’.