Compressed margins, large provisions hurt Pan Asia Bank 3Q

Pan Asia Banking Corporation PLC saw subdued profits in the three months to September (3Q22), on massive provisions against possible bad loans, currency depreciation impact and compression in margins, amid the rising funding cost and muted growth in new credit. 

The bank reported a net interest income of Rs.2.28 billion in the July-September period, down one percent from a year earlier, as the interest expense rose twice as high as the increase in the corresponding interest income. The bank raised deposits at a faster clip, compared to the increase in loans at elevated rates while its existing portfolio is also being repriced at higher rates, putting upward pressure on the bank’s funding cost and thereby denting 
its margins.

As a result, the net interest margin fell to 4.98 percent, from 5.18 percent at the beginning of the year, as opposed to many of its peers, who managed to stretch their margins higher, as the rising interest rates help financial intermediaries to expand their margins, although it may come at a cost to the growth.   In the nine months to September, the bank raised Rs.11.21 billion in new deposits, at a growth of 7.7 percent, nearly twice the Rs.6.4 billion expansion in the loan book, which translated into a growth of 4.2 percent, part of which also stems from the translation of the foreign currency-denominated assets and liabilities, under the steeply depreciated rupee against the dollar.  As seen across the banking industry, Pan Asia Bank also had to set aside higher provisions of Rs.830.4 million in the three months for loans and advances and foreign currency- denominated government securities. 

However, the impact of currency depreciation on the impairment charges of loans and advances and government securities denominated in foreign currency were recognised under other operating losses, which was at Rs.428.7 million for the quarter. 

Such provisions, which were made in massive scale, undermined the September quarter earnings of banks, as they continued to build up provisions against possible loan defaults and of course, the foreign currency-denominated securities issued by the government, which are now in default.

The prospect of likely restructuring of rupee-denominated government securities has spooked many, though the likelihood remains low, given the adverse impact that could have on the banking sector capitalisation.  At Pan Asia Bank, capital adequacy ratios remain above the regulatory minimum levels. However, as of late, some big lenders were seen announcing bond issuances to bolster their Tier II capital levels after their capital buffers came under pressure this year from higher provisions made against the government securities.  The bank also saw its net fee and commission income coming down by 13 percent to Rs.393.9 million over the same period last year, reflecting the weaker growth in loans, which typically carry fees and commissions. The bank was seen keeping a closer tab on its operating costs, as the costs rose by 3 percent from a year ago. 

The bank reported earnings of 23 cents a share or Rs.100.8 million for the September quarter, compared to the earnings of Rs.1.47 a share or Rs.651.8 million reported in the corresponding period last year, reflecting the larger toll the dourer economic conditions had on the bank’s bottom line. 

“Our performance is a testament that we have put quality over quantity this year when the circumstances dramatically changed from what we witnessed last year. This is while managing the assets and liabilities to generate returns from our existing portfolio while also keeping a closer tab on the operational expenses amid runaway inflation,” said the bank’s Chief Executive Officer Nimal Tillekeratne.

Billionaire investor Dhammika Perera has a 29.99 percent stake in Pan Asia Bank.