Fitch affirms Standard Chartered Bank Sri Lanka at ‘AAA’; Outlook Stable

Fitch Ratings Lanka said yesterday it has affirmed Standard Chartered Bank, Sri Lanka Branch’s (SCBSL) National Long-Term rating at ‘AAA(lka)’. The Outlook is Stable. SCBSL’s rating is at the highest end of the national rating scale and reflects the financial strength of Standard Chartered Bank PLC (SCB). The rating is tied to SCB’s Issuer Default Rating (IDR) of ‘AA-’/Stable, given SCBSL’s legal status as a branch of the former and that both are part of the same legal entity.

SCBSL accounted for 0.1% of SCB’s total assets at FYE10 (financial year ended 31 December 2010). SCB’s rating is higher than the Sri Lanka’s Foreign Currency IDR of ‘BB-’/Stable.

SCBSL’s Tier 1 capital adequacy ratio improved to 17.2% at end-December 2010 (December 2009: 5.8%) after coming under pressure in the previous year due to losses resulting from provisions made on oil hedging contracts with the state-owned Ceylon Petroleum Corporation.

Although all dues were transferred to SCB in June 2010, the overhang of these transactions has remained with the regulator imposing an LKR27bn fine for alleged violation of Exchange Control laws stemming from these transactions. SCBSL has appealed the fine and is awaiting a response. Although the quantum of the fine is higher than the equity of the local branch (end-March 11: LKR 16.5bn), Fitch is of the view that timely support would be available from SCB to meet depositor and creditor obligations, if it is required. However, such support would be dependent on any regulatory restrictions or delays in remitting money into Sri Lanka, none of which is envisaged at the moment.

SCBSL’s loan growth of 13% in 2010 was considerably lower than that of the licensed commercial bank (LCB) sector (around 26%) and remained focused on existing clients.

Total advances accounted for only 53% of assets at end- March 11 compared to an average of 60% in 2006-2009, resulting in a relatively liquid balance sheet at end-2010. 80% of total advances are to the corporate segment with the remainder comprised mainly retail lending in the form of credit cards (6.4% advances) and personal loans (7.9% of advances). SCBSL’s asset quality was strong with its gross NPL ratio improving to 0.9% at end-March 11 (FYE10: 2.0%), supported by improving macro-economic conditions in Sri Lanka and the bank’s selective lending criteria. Around 89% of NPLs originated from the bank’s retail segment, with incremental loan growth originating from its corporate portfolio which had a significantly lower NPL ratio.

Operating in Sri Lanka since 1892, SCBSL is Sri Lanka’s second-largest foreign bank branch and has a network of 10 branches. With an asset base of LKR84bn, it accounted for 2.9% of LCB sector assets as at end-2010.