Rpt fitch affirms peoples merchant finance at bb+(lka)

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(Repeat for additional subscribers)June 27 (The following statement was released by the rating agency)Fitch Ratings Lanka has affirmed People's Merchant Finance PLC 's (PMF) National Long-Term rating at 'BB+lka'. The Outlook is Stable. KEY RATING DRIVERS - NATIONAL RATINGS AND SENIOR DEBT

PMF's rating reflects Fitch's expectation that support would be forthcoming from its main shareholder, state-owned People's Bank (PB; 'AA+(lka)'/Stable), if required. PB has a 36% effective shareholding in PMF, directly and via PB's subsidiary People's Leasing & Finance PLC ('AA-(lka)'/Stable). Fitch's view of support is also based on PMF's association with, and consequent reputational risk to, PB's franchise given the common brand identity, PB's representation on PMF's board and support demonstrated by PB in the form of borrowings and equity injections. Nevertheless, there is a multiple notch differential between PMF's and PB's ratings, taking into account PMF's relatively less important role in and lower integration with the group's overall operations.

RATING SENSITIVITIES- NATIONAL RATINGS AND SENIOR DEBT PMF's rating may be downgraded if there is any change to PB's ability or propensity to extend support. This may stem from a change to PB's National Long-Term Rating or a material weakening of linkages with PB, such as a dilution of PB's effective shareholding or board control.

PMF's standalone profile is very weak and characterised by continuing operating losses, deteriorating asset quality, and a thin loss-absorption capacity. The company made a pre- impairment operating loss of LKR6.7m in FY14 as a result of lower net interest margins and high operating costs. PMF also incurred significant loan impairment charges of 3% of average loans in FY14. This stemmed from a further weakening of PMF's asset quality along with a challenging macroeconomic environment, which has affected its largely subprime customer base. Fitch believes that PMF's loan book could face further asset quality stress unless risk management is strengthened. PMF's funding is predominantly from term deposits, which, although improving, remains concentrated. Fitch expects liquidity support from PB to be forthcoming if required. Fitch believes that PMF is likely to be merged or acquired as a part of the Government of Sri Lanka's 'Master Plan' to consolidate the financial system.