The Bank was incorporated in 1961 under the Peopleâ€™s Bank Act No. 29 of 1961, with the primary objective of developing the cooperative movement in the country through rural banking and agricultural credit. PB is the second-largest LCB in Sri Lanka, accounting for 18.44% of the industryâ€™s assets as at end-December 2010. The GOSL owns 92.27% of PB. Underscored by the systemic importance derived from its dominant market position, state ownership, significance as a state employer and facilitating role in the governmentâ€™s long-term macroeconomic objectives, we opine that state support will be readily extended in times of need, both operationally and financially. Since 2005, GOSL has infused LKR 6 billion of equity into the Bank.
Under the PB umbrella, the Bank operates several subsidiaries and associates. That said, the Bank continues to dominate the Peopleâ€™s Bank Groupâ€™s (â€œthe Groupâ€�) asset base, accounting for 90.58% as at end-December 2010. Its fully-owned subsidiary, Peopleâ€™s Leasing Co PLC (â€œPLCâ€�), contributes 9.41% of the Groupâ€™s assets. Notably, PLC is the largest specialised leasing company (â€œSLCâ€�) in Sri Lanka in terms of assets. Apart from SLCs, the Group also has interests in registered finance companies (â€œRFCsâ€�), insurance, micro-financing, property development, and travelling. However, these subsidiaries are relatively small.
The Groupâ€™s asset quality is deemed good. Despite catering to a relatively high-risk segment compared to other LCBs, the Group has managed to keep its gross nonperforming-loan (â€œNPLâ€�) ratio in line with those of its peers. While the Bank is the biggest NPL contributor to the Group (95%), we note that about a third of these were due to legacy NPLs that have already been adequately provided for. The Groupâ€™s gross NPL ratio eased to 4.72% as at end-FYE 31 December 2010 (â€œFY Dec 2010â€�), from 6.52% a year earlier, backed by a lower quantum of gross NPLs (LKR 19.88 billion vs LKR 21.19 billion as at end-FY Dec 2009). At the same time, PBâ€™s gross NPL ratio had also improved from 6.50% to 4.93% amid fewer new NPLs and better recoveries; the ratio eased further to 4.55% as at end-June 2011.
Meanwhile, the Groupâ€™s performance is considered good. Supported by the Bankâ€™s lucrative pawn-broking business and PLCâ€™s leasing portfolio, coupled with a low-cost funding base, the Groupâ€™s net interest margin (â€œNIMâ€�) has been outperforming its peersâ€™. That said, the Groupâ€™s NIM eased from 5.59% as at end-FY Dec 2010 to 5.28% as at end-1H FY Dec 2011 because its lending rates had been pressured by virtue of it being closely aligned with the GOSLâ€™s macroeconomic objectives (especially for those related to agriculture and trading), the prevailing competition within the LCB industry and increased reliance on borrowings. Moreover, the Bankâ€™s cost-to-income ratio of 70.94% as end-FY Dec 2010 was higher than those of its peers â€“ a result of its extensive branch network and inflated work force as a state-owned employer. Thanks to the Bankâ€™s healthier gross income, however, this ratio had eased to 60.29% by end-1H FY Dec 2011. On a related note, the Groupâ€™s cost-to-income ratio is better than the Bankâ€™s owing to its subsidiaries that operate through a relatively low-cost base due to group-wide synergies. The Group achieved pre-tax profits of LKR 11.39 billion in FY Dec 2010 (FY Dec 2009: LKR 7.89 billion); of which the Bank accounted for the lionâ€™s share of 75.13% while the leasing segment made up another 24.82%.
The Group is perceived to have a healthy funding position. Its funding mix is dominated by customer deposits, which accounted for 77.96% of its total funding requirements as at end-June 2011. Its strong funding base is supported by its extensive branch network and public confidence in its state ownership. While customer deposits dominated the Bankâ€™s funding base accounting for 84.47% during the same period, its loan-to-deposit (â€œLDâ€�) ratio deteriorated from 71.63% as at end-FY Dec 2009 to 77.32% as at end-FY Dec 2010, premised on the increased reliance on borrowings to fund its strong loan growth. That said, its LD ratio is the best among its peers.
On a separate note, the Groupâ€™s liquidity position is viewed to be commendable despite the decline of its statutory liquid-asset ratio to 26.96% as at end-FY Dec 2010 (end-FY Dec 2009: 32.18%) due its aggressive loan growth. While the Bank demonstrated same trends, as at end-June 2011 statutory liquid-asset ratio improved to 26.81% from 23.38% as at end-FY Dec 2010 amid slightly lower loan growth in comparison to the previous period. This ratio is also in line with those of its banking peers. Notably, the Groupâ€™s asset-liability maturity mismatch (â€œALMMâ€�) in the â€œless than 1 yearâ€� bucket improved in fiscal 2010, following the expansion of its pawn-broking portfolio through short-term funding.
Meanwhile, the Groupâ€™s capitalizstion is viewed to be adequate. Its tier-1 and overall riskweighted capital-adequacy ratio (â€œRWCARâ€�) clocked in at 7.45% and 11.57% as at end-June 2011, respectively (end-FY Dec 2010: 8.54% and 12.77%), easing slightly due to its loan growth. The Bankâ€™s tier-1 and overall RWCARs were in line with those of its banking peers, at a respective 7.10% and 11.53% as at end-June 2011 (end-FY Dec 2010: 7.92% and 12.82%). That said, PBâ€™s ratio on net NPLs to shareholdersâ€™ funds remained high relative to its peers, at 33.17% as at end-FY Dec 2010 (end-FY Dec 2009: 41.63%).