Fitch Affirms Sri Lanka's People's Leasing at 'A-(lka)'

Fitch Ratings-Colombo/Singapore-26 January 2010: Fitch Ratings has today affirmed People's Leasing Company Limited's (PL) National Long-term rating at 'A-(lka)'. The Outlook is Stable. At the same time, the agency has affirmed the 'BBB+(lka)' rating on the company's LKR1bn subordinated debenture issue (which was to take place in 2008) and simultaneously withdrawn the issue rating.

The affirmation of PL's National Long-term rating reflects its relatively good financial profile and dominant market position as one of the largest specialised leasing companies in Sri Lanka. The rating also reflects PL's good access to institutional funding, underpinned by the strength of its parent, the state-owned People's Bank (PB, 'A(lka)'/Stable, which owns 100% of PL), and Fitch's view that the cyclical weakening of the company's asset quality since 2007 is likely to reverse over the medium-term. However, PL's rating could come under negative pressure if the recovery of its profitability or asset quality lags that of its peers, or the sector as a whole.

The deterioration in PLC's asset quality showed signs of easing in the quarter ending 30 September 2009 (Q210), subsequent to a peak in June 2009. Fitch expects the improvement in asset quality to continue, as the local economy recovers from a high inflation and high interest rate environment that prevailed over the 24 months to end-December 2008. While structural improvements to PLC's monitoring and collection mechanism made in the recent past could help speed-up recovery, Fitch expects the company's non-performing loans (NPLs) to remain high, at least through 2010, as compared to levels seen prior to 2008. This underscores the severity of the recent economic downturn, and it is in line with the agency's expectations for the broader vehicle finance/leasing sector.

Profitability, as measured by return-on-assets (ROA), improved to an annualised 3.86% at end-September 2009 from a low of 2.75% at end-June 2009. This is brought on by a widening in net interest margins that outstripped credit costs and the NPL drag on interest yield, amid falling market interest rates during the period. Despite the improving trend at present, PLC's ROA could remain pressured in 2010, dampened by credit costs and NPL drag.

PL's mainstay is the provision of vehicle finance. As of 31 March 2009, PL's group assets amounted to LKR25.5bn and accounted for over 23% of total sector assets. PL completed the acquisition of a 97% stake in People's Leasing Finance PLC (PF, BBB-(lka)/Stable, formerly Seylan Merchant Leasing) on 3 July 2009. PF is a registered finance company, which can accept public deposits by virtue of its license. PL plans to diversify its consolidated funding profile and reduce cost of funds over the medium-term, via the acquisition of public deposits through PF.

People's Bank owns a 1.78% share in Fitch Ratings Lanka Limited. No shareholder, other than

Fitch Ratings Limited UK, is involved in the day-to-day operations of, or credit rating reviews

undertaken by Fitch Ratings Lanka Limited.

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

A related special comment entitled "Profitability of Sri Lanka's RFC and SLC Sectors to improve in 2010, but Asset Quality to Remain Weak", published on 8 January 2010, is also available at www.fitchratings.lk and www.fitchratings.com.