Fitch affirms Citibank Colombo Branch at ‘AAA(lka)’

Fitch Ratings Lanka has affirmed Citibank N.A. - Colombo Branch’s (CitiSL) National Long-Term rating at ‘AAA(lka)’. The Outlook remains Stable.

CitiSL’s rating reflects Citibank N.A.’s (Citibank) financial strength. Given that CitiSL is a branch and part of the same legal entity as Citibank, Fitch believes that support from the latter would be forthcoming if required, subject to any regulatory constraints on remitting money into Sri Lanka.

Citibank is rated ‘A+’/Rating Watch Negative, which is higher than the sovereign’s Foreign Currency Issuer Default Rating of ‘BB-’/Stable Outlook.

CitiSL follows the group’s global credit policy with a significant oversight by Citibank’s cluster office in India and regional office in Hong Kong. CitiSL has continually focused on loans to large corporates and multinationals and despite exercising strict lending criteria, bears significant credit concentration in its loan book.

For the six months ended June 2011 (H111), the branch’s 11 largest group borrowers accounted for 80% of total loans (FYE09: 84%). High credit concentration coupled with the short-term nature of the loans makes the loan book susceptible to fluctuations upon loan repayment. However, Fitch takes comfort in the bank’s policy of lending to entities with strong creditworthiness within the local market.

CitiSL’s net interest margin improved to 6.7% in FY10 from 5.5% in FY09. In addition, revenue was supported significantly by forex gains and fee as well as commission business. Loan growth was 1% yoy at end 2010 followed by growth of 38% in H111 as a result of improved macroeconomic conditions and general credit growth within the banking sector.

Growth was experienced mainly in existing clients and the Government of Sri Lanka. In line with its loan growth, the bank’s top 10 borrowers’ (excluding Government) to equity increased to 97% at end-June 2011 from 44% at end-2010.

CitiSL’s capitalisation has historically remained strong, mitigating its high credit concentration. Its core and total capital adequacy ratios (CAR) were 33.4% and 33.8%, respectively, at end-June 2011.

At FYE10, CAR decreased to 25.10% and 25.4% from 40.2% and 40.6% at FYE09 on account of deductions from Tier 1 capital due to account placements with Citibank branches and the head office. In addition, the equity/assets ratio was 30.5% at end-June 2011 (FYE10: 34.1%), which was well above peers’. The bank has maintained zero non-performing loans since 2009.

Citibank established local operations in 1979 and operates through a single branch.