Fitch Affirms Sri Lanka's Pan Asia Bank's National Long-term Rating at 'BBB-(lka)'

Fitch Ratings-Colombo/Mumbai/Singapore-24 December 2009: Fitch Ratings Lanka has today affirmed Pan Asia Banking Corporation PLC's (PABC) National Long-term rating at 'BBB-(lka)'. The agency has also affirmed PABC's proposed subordinated debenture issue of up to LKR150m (which was to take place in 2008) at 'BB+(lka)', and simultaneously withdrawn the rating. The Outlook is Stable.

PABC's rating is constrained by its weak asset quality and consequently high net NPLs/equity ratio. Fitch further notes that although capital adequacy ratios of the bank remain strong, PABC has yet to meet the LKR2.5bn minimum capital requirement imposed on all licensed commercial banks by the regulator-the deadline for which has now been extended to June 2010.

PABC operates mainly in the SME customer segments, though in recent years it has also been growing its corporate loan book (about 10% of loans at September 2009 compared to about 5% at FYE05). The loan book contracted 11% in the nine-month period to end-September (9M09) due to the repayment of a few large facilities towards the end of Q309, and with the bank taking a cautious approach to loan growth amid the prevailing credit environment. Inline with the sector, asset quality weakened considerably in the period FYE07-end-September 2009. However, the bank stepped up recovery efforts and increased its recovery staff in mid-2009, and Fitch notes the reduction in the rate of NPL accretion with the bank's infection ratio (incremental NPLs/beginning period loans) falling to 2.3% in 9M09 (FY08: 4.6%). Un-provided NPLs accounted for 49.9% of equity at end-9M09 (FYE08:56.5%).

Profitability as measured by returns on assets (ROA) improved to 2.5% in 9M09 (FY08:1.3%), driven largely by marked-to-market gains on PABC's government securities portfolio; over 80% is held for trading. ROA, excluding capital gains, was approximately 1.3% in 9M09 which was in line with the licensed commercial bank (LCB) sector. However, higher operating costs, driven by PABC's proposed branch expansion in 2010 and higher credit costs could place downward pressure on profits in FY10.

Fitch notes there were several changes to senior management positions in H209, and that PABC is in the process of re-segmenting some of its key product lines as well as tightening credit processes and strengthening the overall risk management framework. However, the impact of these changes on the bank remains to be seen.

PABC, is a small LCB established in 1995, and is 35.3% owned by Mr. K.D.D. Perera and related parties. It operates through a branch network of 35.

A credit update will be available shortly on Fitch's websites www.fitchratings.com and www.fitchratings.lk