An A-(sri) long term rating reflects low expectation of credit risk, but the bank is still vulnerable to changes in circumstances or in economic conditions than is the case for higher ratings, Fitch said in a statement on Wednesday.
"The rating action reflects People's Bank's improving financial profile, particularly the bank's capital position. The rating also reflects its state ownership and systemic importance."
Although still substantially short of meeting minimum regulatory capital requirements, (Rs.3.2billion shortfall in Tier I capital) People's Bank's equity position has improved considerably through healthy internal capital formation over the last few years.
Last December, the bank got the first in the series of a Rs.
2.0billion capital infusion from the Asian Development Bank (ADB), under the government's financial restructuring aid programme.
Under the overall recapitalisation plan, the bank will get Rs.
6.5 billion capital infusion in three stages by 2008.
The ADB has stipulated performance milestones to be achieved by both the government as well as the bank in order to draw this money.
While the bank is likely to meet its targets, the government's targets may prove more challenging as they include broader reform, which have proved to be difficult to implement in the past.
People's Bank credit ratings, however, will improve further once the recapitalisation programme is completed successfully.
While there have been several previous attempts, the current restructuring process, which effectively got underway in 2000, has been the most substantive.
People's Bank's profitability has steadily improved although a high overhead structure continues to hamper its progress.
A key driver of its profitability has been the increase in low cost customer deposits and a change in product mix in favour of consumer loans.
Focussed recovery efforts and write-offs have enabled the bank to improve its asset quality.
People's Bank's NPL ratio (net of provisions) was low at 2-percent as at Dec 2005.
However, loans extended to state owned entities made up around 9-percent of total loans.
Though classified as performing, some of these borrowers would depend on the bank to roll over the loans at maturity or require support from the government to repay.
That said, a majority of these loans are to important public utilities, such as the state owned power utility where state support would be most likely.
People's Bank is the second largest local bank in terms of assets and commands a market share of about 19 percent in the banking system.
The bank was established under an Act of Parliament in 1961 to develop the co-operative movement of Sri Lanka and enhance rural banking.
To support ongoing operations, the government has extended a 'Letter of Comfort' (since 1999) undertaking to support the bank with equity to the extent required to meet minimum capital requirements.
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