State & State enterprise loans account for nearly half of all loans at People’s Bank: Fitch

The exposure to State and State-owned enterprises at People’s Bank has risen to nearly 50 percent of its total loans outstanding by the end of the first quarter in 2021 from 38 percent in 2019, but the momentum could slowdown going forward with limited headroom at the bank’s leverage and liquidity, Fitch Rating said. 

The State-owned lender stretched its loan book by a robust 10.6 percent or Rs.183.4 billion during the three months ended on March 31, 2021 to Rs.1.91 trillion, the interim results showed. 

But the leverage ratio was at 3.52 percent compared to the regulatory minimum of 3.0 percent, although up from 3.47 percent in December 2020, while the liquidity ratio was at 25.09 percent, not excessively high in relation to the regulatory minimum of 20 percent and the pace at which the bank was growing its loan book. 

During the financial year ended December 31, 2021, the bank expanded its loan book by as much as 21.5 percent. 

The bank’s Tier I capital ratio, which mainly composed of equity, increased to 10.07 percent from 9.53 percent in December 2020, while total capital or Tier II capital ratio inched up to 15.61 percent from 15.47 percent. The regulatory minimums for each stand at 8.5 percent and 12.5 percent respectively. 

But the overall aggressive loan growth, including the non-State lending by the bank could be constrained for a certain degree due to tight capital and liquidity position, Fitch said. 

“Fitch expects People’s Bank’s tight capital and liquidity positions, which are close to the regulatory minimums, to constrain further the aggressive loan book expansion for the near to medium term,” the rating agency said. 
While the short-term earnings could be supported by high loan growth and downward re-pricing of deposits, the rating agency expects the earnings to come under pressure in the medium term from the constrained ability for loan growth and liquidity limitations.  

People’s Bank reported earnings of Rs.7.68 billion for the quarter ended in March 31, 2021, up 86.4 percent from the same period in 2020 supported by the accelerated loan growth and the improved margins from deposit repricing under low interest rates. 

The bank during the period improved its asset quality as measured by the gross non-performing loans ratio, which declined to 2.99 percent from 3.25 percent in December 2020, but Fitch expects the asset quality to deteriorate, “particularly in the non-State lending portfolio as pandemic-related relief measures that were extended in 2021 are gradually unwound”.

People’s Bank is at the forefront of extending loans under concessional rates to wider segments identified by the government as priority sectors under its policy framework to re-build a stronger domestic production economic base.