RAM reaffirms Sanasa Development Bank’s ratings at BBB/P3 with a stable outlook

RAM Ratings Lanka has reaffirmed the respective long- and short-term financial institution ratings of Sanasa Development BankLimited (SDB), at BBB and P3; the long-term rating carries a stable outlook. The ratings are supported by the bank’s healthy performance, adequate asset quality, funding as well as liquidity levels, along with its strong rural presence, particularly in micro-financing.

However, the ratings are moderated by SDB’s small stature and its relatively risky target clientele.

SDB is a licensed specialised bank (LSB) accounting for 3.05% of the LSB industry’s assets as at end-December 2010; the largest player took up the lion’s share of approximately 70%. As the apex financial institution of the Sanasa movement, i.e. the largest cooperative network in Sri Lanka, SDB’s clients are predominantly gained t rough the branch network of the movement.

The bank concentrates on small-ticket micro-financing, leasing, project financing and housing loans for the rural masses, which generally lies beyond the risk appetites of most financial institutions. Loans are also extended to non-members as well as small and medium-sized enterprises (SMEs).

RAM Ratings Lanka deems the bank’s asset quality to be adequate, supported by its proven ability to maintain credit quality despite its relatively risky client profile. SDB’s credit assets had charted a modest 18.26% year-on-year (y-o-y) growth to Rs. 14.14 billion as at the end of FYE 31 December 2010 (FY Dec 2010).

At the same time, the Bank’s gross non-performing loans (NPL) (classified on a three-months basis) only inched up 2.79% to Rs. 725.29 million; this was supported by SDB’s better recovery procedures on the back of its group lending system and proximity to its clients through the cooperative network.

Given by its enlarged loan base, the bank’s gross NPL ratio ameliorated to 5.72% as at end-FY Dec 2010 (end-FY Dec 2009: 6.59%).

Nevertheless, this ratio was pushed up to 6.14% as at end-1H FY Dec 2011, the result of an influx of NPLs arising from, more stringent NPL classification imposed by the Central Bank of Sri Lanka (CBSL).

Meanwhile, SDB’s focus on the economically under-privileged had enabled the Bankto charge higher interest rates on its loans, thereby allowing it to enjoy better net interest margins (NIMs) than its peers, both LSBs and licensed commercial banks (LCBs).

The Bank’s NIM is further supported by its lower funding costs due to the faster re-pricing of deposits relative to fixed-rate loans and advances in an environment of tapering interest rates.

In FY Dec 2010, the Bank’s NIM widened to 10.50% (FY Dec 2009: 9.01%). Notably, SDB maintained its healthy performance in fiscal 2010, as reflected by the 45.14% y-o-y surge in its pre-tax profit to LKR 646.60 million; this translated into a better return on assets (ROA) of 3.95% for the year (FY Dec 2009: 3.36%), surpassing those of its LSB and LCB peers.

However, the bank’s NIM and profitability declined in 1H FY Dec 2011, in line with the downward re-pricing of its loan assets and the longer time taken for several branches to break even.

RAM Ratings Lanka deems SDB’s funding and liquidity position to be adequate. While customer deposits dominate its funding structure, we note that the bank’s maturity mismatches eased in fiscal 2010, amid the channelling of equity infusions towards expanding its credit assets.

At the same time, the bank had beefed up its liquidity position, leading to a steady liquid-asset ratio of 25.60% as at end-FY Dec 2010 (end-FY Dec 2009: 25.27%). Nevertheless, the ratio descended to 20.27% as at end-June 2011, on the back of its robust loan growth. SDB’s loans-to-deposits ratio (LD ratio) also weakened to 102.13% as at the same date (end-FY Dec 2010: 98.40%); this is weaker than those of its peers.

However, we derive comfort from the bank’s healthy deposit-renewal rates, which works out to more than 85%, and the availability of LKR 1.3 billion of contingency funding lines.

RAM Ratings Lanka views the Bankto have better capitalisation levels than its peers. SDB reported respective tier-1 and overall risk-weighted capital-adequacy ratios (RWCARs) of 15.61% and 16.30% as at end-FY Dec 2010.

In this regard, the bank’s capital base has been strengthened by continuous equity injections since 2004.

These infusions have reinforced SDB’s capitalisation, with sufficient buffer to absorb any potential delinquency. As such, the bank’s ratio of net NPLs to shareholders’ funds clocked in at 25.57% as at end-FY Dec 2010 (end-FY Dec 2009: 33.02%), i.e. better than its peers.