Fitch Ratings-Colombo-24 July 2013: 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 reflects Fitch's expectation of state support, if needed, to the bank given the state's 100% effective ownership and PSB's role in supporting economic policy on rural development. However, the potential for state support is lower than larger state-owned banks in Sri Lanka due to its lower systemic importance.
A change in Fitch's expectation of state support to PSB through greater systemic importance could result in a positive rating action.
A downgrade of Sri Lanka's 'BB-' rating or a change in Fitch's expectation of support to PSB through, for instance, a significant deviation in lending away from core micro finance lending could place downward pressure on the rating.
The bank's loan exposure remains predominantly to the agriculture sector including through pawning (gold- backed) loans (45% of loans at end-2012). Although loans are still largely granular, PSB intends to expand its larger ticket size lending with a focus on SMEs. . Fitch believes that any significant deviation from core micro finance lending could increase the risk profile of the bank and potentially diminish its policy role.
PSB's regulatory core capital adequacy ratios (CARs) deteriorated to 10.3% at end-2012, (2011: 11.84%) while total CAR remained just above the regulatory minimum 10% at 10.61% at end-2012 (2011:12.18%). CARs are supported by a zero capital allocation for pawning advances based on domestic regulation. In 2012, PSB's profitability, measured through return on assets (ROA), weakened to 0.8% (2011:2.1%), largely due to an increase in staffing cost. Dividend pay-outs have continued to constrain internal capital formation in the absence of an equity injection.
PSB's reported regulatory non-performing loans (NPLs) increased significantly due to a correction in NPL classification and the impact of adverse weather conditions on the bank's agriculture-related exposures. This drove up the gross NPL ratio to 7.3% at end-Q113 from 2.2% at end-2011. Provisions for impaired loans covered only 33.9% of regulatory NPLs at end-Q113. PSB is likely to increase its provisions cover on pawning loans in recognition of potential pressures from volatile gold prices. The bank could benefit from increased centralisation of accounts and internal reporting system to enhance management oversight. PSB, which is the product of an amalgamation of six regional development banks in 2010, currently relies on three different operational platforms across the regions It expects to implement a core banking platform by mid-2014.
PSB is a licensed specialised bank governed by the Pradeshiya Sanwardhana Bank ACT no 41 of 2008.
Further details on PSB are available on www.fitchratings.com and www.fitchratings.lk