ICRA Lanka assigns [SL]AAA rating with Stable Outlook to National Savings Bank

ICRA Lanka Ltd., subsidiary of ICRA Ltd., a group company of Moody’s Investors Service, has assigned the issuer rating of [SL]AAA with Stable outlook to National Savings Bank (NSB).

The rating takes note of the 100% Government of Sri Lanka (GoSL) ownership, which provides a strong likelihood of sovereign support and, the 100% explicit guarantee provided by the Government of Sri Lanka (GoSL) for the monies deposited with the bank and the interest thereof through the National Savings Bank Act (NSB Act). 

The rating factors in the low risk investment portfolio, good quality lending portfolio and the presently adequate capital profile. 

The earnings of the bank moderated as a result of de-recognition of Rs. 3.6 b as net income earned from the Government securities transactions from 1 April as a result of removal of Withholding Tax from Government securities transactions. 

The bank’s investment portfolio is characterised by low risk, with NSB mandated to invest a minimum of 60% of the total deposits in Government securities; as in March 2019, 62% of the deposits was in Government securities. The quality of the lending portfolio is driven by zero NPAs reported on its exposure to GoSL, SOE1 and corporate portfolio which accounted for 41% of the lending portfolio. 

The standalone Gross NPA ratio (GNPA%) of the retail portfolio (59% of lending portfolio) stood at 2.46% as of Dec-18. NSB’s BASEL III complied total capital adequacy ratio (CAR) stood at 15.43% (Tier-I capital ratio at 12.81%) as compared to 14.00% (Tier-I capital ratio at 10.00%) regulatory requirement as of Mar-19. 

ICRA Lanka notes that moderation in internal generation will require the bank to secure commensurate capital from the GoSL in the medium term. Going forward, maintenance of adequate buffers (at least 1%) over and above the minimum capitalisation requirements (Tier-I plus CCB and total CAR) would be critical for sustenance of the current rating.

Key rating drivers

Credit strengths

100% Government ownership and explicit guarantee on deposits: NSB is a 100% Government owned specialised bank incorporated under the NSB Act in 1972. The main objective of the bank is to promote savings habit in the country. GoSL provides explicit 100% guarantee through the NSB Act for the depositors’ deposit money and the interest there on. 

Since the bank’s inception, NSB has been able to self-fund its capital requirements and has not required any capital support from GoSL. ICRA Lanka expects GoSL’s support, if needed, given the bank’s position of being a systemically important bank and also being one of the important sources for its financing needs. The Government appointed board comprises of a mix of qualified and experienced professionals, including representative from the treasury and the Post Master General. The senior management of the bank consists of qualified and experienced banking professionals.

Low risk nature of its investment portfolio: The bank is mandated to invest a minimum of 60% of the deposits in government securities. As of Mar-19, 62% of the total deposits were invested in government securities, as compared to 61% as of Dec-18 (75% as of Dec-17). 

ICRA Lanka noted a gradual reduction in the share of Government securities since Dec-17, largely as a result of maturity of its Rs. 64 b investment in Sri Lanka Development Bonds in Sep-18 and due to diversification to lending portfolio to optimise its overall yields. As of Mar-19, 93% of the investment portfolio consisted of Treasury Bills and Bonds followed by 4% in placement with banks, 2% in Debentures and Trust Certificates, 1% in listed equity and the balance as investment in subsidiaries, unquoted equities and others. As of Dec-18, close to 97% of the Government security portfolio was classified as AC2 and balance as FVPL3 and FVOCI4. 

The bank’s FVPL equity portfolio reported significant mark to market losses where the market value was Rs. 1,879 m as compared to the cost of Rs. 3,368 m as of Dec-18. Since the equity portfolio represents less than 1% of the total investment portfolio, overall impact on the investment portfolio is expected to be minimal.

Healthy overall asset quality supported by zero NPAs on corporate and GoSL and SOE portfolios; NSB reported Rs. 444 b lending portfolio as of Mar-19 as compared to Rs. 424 b as of Dec-18 (Rs. 376 b as of Dec-17). The portfolio reported an annualised growth of 19% in the latest quarter ended Mar-19 as compared to 13% growth in CY2018 (16% in CY2017). 

The portfolio growth in Q1CY2019 was driven by the retail lending which grew from Rs. 250 b in Dec-18 to Rs. 261 b in Mar-19. As of Mar-19, NSB’s portfolio included retail exposure which contributed to 59%, followed by Government and SOE at 32% and corporate at 9%. Under the retail segment, personal loans, housing loans, pawning and loans against FDs represented 29%, 15%, 7% and 7% respectively of the total portfolio as of Mar-19. 

Based on NSB’s Act, all the SOE loans are secured by Government guarantees and are routed through the Treasury, which further strengthens the credit profile of the lending portfolio. The bank reported a gross NPA ratio of 1.44% as of Dec-18 as compared to 1.34% as of Dec-17, it remained at 1.45% as of Mar-19. 

ICRA Lanka noted that corporate and Government and SoE portfolios of the bank which accounted for 41% (Mar-19) of the total lending portfolio had zero NPAs; ICRA Lanka envisages the same going forward. The retail portfolio of the bank reported a GNPA% of 2.46% as of Dec-18 as compared to 2.39% as of Dec-17. 

At the product level, Auto loans reported a GNPA% of 8.13% followed by Personal loans at 3.32%, Housing loans at 2.65% and Pawning at 0.77% as of Dec-18. ICRA Lanka expects the bank to maintain its GNPA% below the systemic averages going forward. The bank’s IFRS based provision coverage ratio improved to 63% as of Dec-18 from 55% as of Dec-17 with the implementation of IFRS 9 standards.

Granular deposit base; NSB reported a deposit base of Rs. 862 b as of Mar-19 as compared to Rs. 840 b reported as of Dec-18 (Rs. 737 b as of Dec-17). The NSB Act provides explicit government guarantee for the deposits and interest payable thereon. The bank has a granular deposit base with the top 10 depositors accounting for 0.3% of the total deposits. The bank’s short term (less than 1 year) ALM mismatch was negative 71% as of Mar-19 as a result of its shorter tenured deposits as against longer tenured loan portfolio. The bank’s Liquidity Coverage Ratio stood at 309% as of Mar-19 as compared to the regulatory requirement of 100%. The bank’s significant investment in Government securities provides comfort on the liquidity.

Adequate capital profile; NSB reported a Tier-I Capital Ratio of 12.81% and total capital ratio of 15.43% as of Mar-19 as compared to the regulatory requirement of minimum Tier-I Capital Ratio of 10.00% and total capital ratio of 14.00%. The bank’s core capital stands at about Rs. 30 b as compared to the Rs. 7.5 b regulatory core capital threshold to be achieved by 31 December 2020. 

Based on ICRA Lanka’s computation, the bank will require a Tier-I capital infusion of Rs. 1.0-1.2 b in the next three years to maintain a 10-15% growth factoring a 2% capital buffer and 8% internal capital generation. ICRA Lanka believes that as a systemically important bank, the government of Sri Lanka will provide the required funding support to the bank when needed. Going forward, maintenance of adequate buffers (at least 1%) over and above the minimum capitalisation requirements (Tier-I plus CCB and total CAR) would be critical from a rating perspective.

Credit challenges

Moderating profitability indicators; NSB’s NIM moderated to 2.43% in CY2018 from 2.61% in CY2017 as a result of removal of Withholding Tax on Government securities in Apr-18. In Q1CY2019, NIM improved with the repricing of the matured investments in Government security portfolio. 

The bank reported a trading loss of Rs. 707 m in CY2018 as compared to Rs. 1,206 m profit in CY2017. The trading loss was due to mark to market loss in the equity portfolio. ICRA Lanka noted that, in CY2017, the bank’s subsidiary NSB Fund Management Company Ltd. declared Rs. 750 m dividend which supported the profit reported in the same period. 

The bank’s PAT dropped to Rs. 4.5 b in CY2018 as compared to Rs. 9.7 b reported in CY2017. The main reason was due to removal of Withholding Tax from the Government securities, which resulted in non-recognition of income of close to Rs. 3.6 b. The bank reported a RoA of 0.85% in Q1CY2019 as compared to 0.78% in CY2018 (1.47% in CY2017).