RAM assigns BBB-/P3 rating to Sri Lanka Savings Bank with a stable outlook

RAM Ratings Lanka has assigned respective long- and short-term financial institution ratings of BBB and P2 to Sri Lanka Savings Bank; the long-term rating has a stable outlook.

The ratings are upheld by the Bank’s State ownership and the ongoing support derived from the Government of Sri Lanka. The ratings also reflect SLSB’s strong capital cushioning and liquidity levels as well as its good asset quality. On the other hand, the ratings are moderated by the bank’s small stature.

Incorporated in 2006, SLSB is a State-owned licensed specialised bank. It had been established with the primary objective of taking over the business of Pramuka Savings and Development Bank, a private LSB that defaulted on its debt obligations in 2002 due to mismanagement of funds.

The Monetary Board of the Central Bank of Sri Lanka vested the assets and liabilities of Pramuka with SLSB on 1 August 2007.

The bank had been registered as an LSB on the strength of a letter of comfort issued by the Ministry of Finance and Planning because its core capital had been below the regulatory minimum at the point of establishment. However, this has now been lifted upon its compliance with the core capital requirements following its merger with another State-owned entity, the National Development Trust Fund (NDTF), in September 2010.

The NDTF operates as a conduit in channelling government funds for micro-financing activities, with the primary objective of uplifting the country’s rural economy. RAM Ratings thus believes that the ongoing support derived from the Government is reflected in the efforts of merging the NDTF with SLSB as well as from its State ownership. Nonetheless, the bank is a relatively small player, accounting for only 1.27% of the LSB industry’s assets as at end-December 2010.

In settling dues payable to Pramuka deposit holders and lenders, SLSB is required to adhere to a liability settlement scheme formulated by the Monetary Board. This scheme limits the settlement of liabilities to the availability of Pramuka’s liquid assets and the recovery of its non-performing assets and earnings, thus providing adequate ring-fencing of the bank’s funds.

Pramuka’s liabilities amounted to Rs. 1.88 billion as at end-October 2011, and are to be settled by end-2017. At the same time, Pramuka’s loan portfolio was valued at Rs. 1.45 billion while its liquid assets amounted to Rs. 1 billion.

Following its merger with the NDTF, the bank’s asset base now largely consists of the former’s assets. The NDTF’s Rs. 1.23 billion micro-credit portfolio is perceived to be of relatively good credit quality as reflected in its low delinquency rate of around 2%; this portfolio has been transferred to SLSB.

Notably, the bank’s balance sheet is now more liquid after its merger with the NDTF; cash and money at call thus accounted for around 40.31% of the bank’s total assets as at end-December 2010.

Going forward, SLSB will continue to reimburse micro-financing advances disbursed via a network of partner organisations, i.e. the model followed by the NDTF. This mechanism of wholesale lending has enabled the bank to simplify its monitoring procedures. This, coupled with its stringent underwriting standards, has supported its credit quality, resulting in low delinquency rates.

On a separate note, the credit assets transferred from Pramuka had been non-performing, albeit fully provided for, with the bulk collateralised by property. Although the bank’s gross non-performing-loan ratio is skewed by the NPLs of Pramuka, its net NPL ratio clocked in at 1.33% as at end-September 2011, i.e. better than those of its similar rated peers.

SLSB’s performance is deemed good, underpinned by its wider margins that are better than those of its banking peers, as well as better operational efficiencies, as indicated by its lower cost-to-income ratio. Going forward, RAM Ratings expects the bank’s performance to improve in line with the anticipated growth of its loan book.

Meanwhile, the bank’s liquidity position is deemed strong. Its statutory liquid-asset ratio stood at 866% as at end-October 2011, well above its peers’. The bank’s funding needs are largely fulfilled by shareholders’ funds, reflecting its merger with the NDTF. That said, SLSB’s funding is deemed adequate due to its limited ability to garner deposits on the back of its still improving franchise and network extension. At the point of incorporation, SLSB had lacked sufficient funds to meet the CBSL’s minimum core-capital requirement of Rs. 1.50 billion for LSBs. Nevertheless, the bank had complied with the statutory core-capital requirement subsequent to its merger with the NDTF; it currently demonstrates strong capitalisation levels, with respective tier-1 and overall risk-weighted capital-adequacy ratios of 79.19% and 79.62% as at end-September 2011.