Fitch Ratings-Colombo/Singapore-08 March 2010: Fitch Ratings Lanka has today removed People's Merchant Bank Plc's National Long-term rating from Rating Watch Negative (RWN) and downgraded the rating to 'BB+(lka)' from 'BBB-(lka)'. The agency has simultaneously assigned a Negative Outlook.

The rating actions reflect PMB's weakened financial profile in terms of its profitability, asset quality and solvency. Fitch takes comfort in PMB's main shareholder, the state-owned People's Bank (Sri Lanka) (PB; A(lka)/Stable), which holds 39% of PMB's equity and has board level linkages with PB.

In support of the government's initiative to aid liquidity-stressed financial institutions, PMB acquired the business operations and selected assets and liabilities of ABC Credit Card Company Limited (ABC), an unregulated company which issued credit cards and accepted deposits, in March 2009. This was carried out through PMB Credit Card Company Ltd (PMBCC), which is a 100% owned subsidiary of PMB incorporated for this purpose. Through PMBCC, PMB made another acquisition in June 2009 (Q110), acquiring Silvereen Finance Company Limited (SFC), a small family-held registered finance company (RFC). SFC was renamed People's Merchant Finance Company Limited (PMF), which is now a 99.9%-owned subsidiary of PMB. PMB is currently awaiting approval from the Central Bank of Sri Lanka to merge with PMF, and thereby become a RFC. PMB's investment in subsidiaries accounted for 11% of the company's assets as at Q310.

PMB's gross non-performing loan (NPL) ratio rose sharply to 29.2% at Q310 (FYE09:12.6%), stemming mainly from a significant increase in delinquencies in its loan portfolio. The gross NPL ratio for the group stood at 31.2% at Q310, which was compounded by the poor asset quality of its subsidiary, PMF. Fitch notes that PMB's NPLs continued to increase into Q410, The agency's view is that asset quality will remain weak for the non- bank financial institution sector in Sri Lanka. The company incurred losses of LKR20m in Q310, mainly due to depressed interest income; The group's losses for the same period were LKR107m, mainly reflecting the losses at PMBCC.

In Q410, PMB raised equity of LKR250m through a rights issue. While this would improve PMB's capitalisation, solvency as measured by net NPL/equity is expected to remain weak. As a specialised leasing company (SLC), PMB is predominantly financed by borrowings (81% of funding at Q310). Fitch expects PMB's funding diversity to improve following the merger with PMF, as the RFC licence would enable deposits to be accepted from the public.

Established in 1983 and listed in 1994, PMB is a specialised leasing company accounting for 2.4% of the SLC sector assets in Sri Lanka as at March 2009. The company is an associate of PB which owns 39.2% of its equity (26% directly and 13% indirectly through People's Leasing Company Ltd, a fully owned subsidiary of PB).

PB has a 1.78% shareholding in Fitch Ratings Lanka but is not involved in either the day-to-day operations or credit rating reviews undertaken by Fitch Ratings Lanka.

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

Applicable criteria available on Fitch's website www.fitchratings.com are: 'Master Global Financial Institutions Criteria', dated 31 December 2009, and 'Finance and Leasing Companies Criteria', dated 31 December 2009