Fitch affirms HSBC Sri Lanka at ‘AAA(lka)’; Outlook Stable

Fitch Ratings Lanka has yesterday affirmed HSBC Sri Lanka’s (HSBCSL) National Long-term rating at ‘AAA(lka)’.The Outlook is Stable.

HSBCSL’s rating reflects the financial strength of the Hongkong & Shanghai Banking Corporation Limited (HKB; ‘AA’/Stable), as the branch is a part of the same legal entity.

HKB is Hong Kong’s largest banking group and is a wholly-owned subsidiary of HSBC Holdings Plc (‘AA’/Stable).

HSBCSL’s loan book expanded by 6.4% in H110 (end-June 2010) after contracting by 12.4% in 2009 on account of depressed private sector credit demand and selective lending. Predominant exposure remains to corporate customers, which comprised 62% of loans at end-2009 while retail loans accounted for the remaining 38%. The bank continues to be the largest issuer of credit cards in Sri Lanka. Credit cards accounted for 18% of loans at end-2009.

The bank’s profitability remained superior to that of the sector. Its return on assets (ROA) increased to 2.6% (annualised) in H110 and 2.1% in 2009 (2008: 1.6%), mostly due to increases in non-interest income, while ROA (excluding gains on government securities) remained strong at 1.6% in H110 and 2009.

HSBCSL’s asset quality continued to remain stronger than that of the sector through the economic downturn, reflecting the customer segment targeted by the bank and its strong risk management capabilities. Its gross NPL ratio increased to 5.3% in 2009 (end-2008: 2.9%) before improving to 4.5% in H110. The NPL recognition and provisioning policy adopted by the bank is more conservative than that required by the regulator.

The primary source of funding for the bank is deposits, which accounted for 65% of total funding at end-2009. Borrowings sourced largely from the group accounted for a further 17% of total funding at end-2009. HSBCSL’s net interest margins continue to be higher than that of sector at 7.7% in 2009, supported by lower funding costs.

HSBCSL remains well capitalised. Following the transfer of profits to HKB the bank reported equity/assets of 9.3% and core and total capital adequacy ratios of 12.9% and 13.6%, respectively, in H110.

Established in Sri Lanka in 1892, HSBCSL is the largest foreign bank branch in Sri Lanka, and the fifth largest licensed commercial bank, accounting for 5.4% of banking sector assets at end-2009.

 The bank has a network of 15 branches located primarily in the Colombo district. HSBCSL offers a broad range of financial products and services, catering to the requirements of multinational corporations, local corporates and individuals.