Fitch affirms Sampath Bank at ‘AA-’/Stable

Monday, 7 October 2013 00:00 -     - {{hitsCtrl.values.hits}}

Fitch Ratings Lanka has affirmed Sampath Bank PLC’s (SB) National Long-Term Rating at ‘AA-(lka)’ with a Stable Outlook. The agency has also affirmed SB’s subordinated debentures at ‘A+(lka)’. Key rating drivers: The National Rating reflects SB’s expanding domestic franchise and modest financial profile. Fitch believes that SB’s asset quality may weaken in 2013, in line with its expectation for the sector, but would continue to compare well against most ‘AA(lka)’ category-rated private bank peers. Similar to the trend seen across the sector, non-performing loans (NPLs) from pawning advances (gold-backed loans) have been rising, contributing to more than half of the increase in SB’s NPLs in H113. SB’s exposure to global gold prices remained high compared with its private bank peers. SB’s pawning advances accounted for 22% of its loans at end-H113. This resulted from an aggressive expansion of this loan book since 2009. The loan-to-value ratio on pawning advances has been reduced, increasing the buffer against any further declines in gold prices. Management intends to gradually reduce such exposure in the loan book. Fitch expects SB’s provision coverage to remain healthy in a local context. Reserves for impaired loans (individual and collective) accounted for 3.2% of loans at end-2012 which compared well against peers. The increase in loan impairment charges in H113 included provisions of close to LKR1bn against its pawning advances in H113. SB’s Fitch core capital ratio reduced from 12.9% to 11.1% at end-H113 after increasing the risk weight on pawning advances to 50%, and increasing the risk weight on government securities denominated in foreign currency to 100% from 0%, which is considered satisfactory for the current rating level. Profitability is likely to be pressured by a potential contraction in net interest margin (NIM), increased credit costs and high operating costs, which is less supportive of equity accretion. Management indicates that internal earnings retention will remain the main source of equity accretion. SB’s current and savings accounts base (32% of total deposits at end- H113) continues to lag behind larger commercial bank peers. Its loans/deposits ratio remained high (92% at end-H113) but is similar to the ratio of most peers. The subordinated debt is rated one notch lower than the issuer rating to reflect its gone-concern loss-absorption quality in the event of a liquidation, in line with Fitch’s criteria for rating such securities. Rating sensitivities: SB’s ability to establish and sustain an enhanced franchise alongside credit metrics commensurate with higher-rated domestic peers could result in an upgrade. However, this is less likely over the medium term, given SB’s higher risk profile relative to higher-rated peers and challenging economic conditions. SB could be downgraded if there is an increase in risk appetite, for instance through aggressive lending or weakening of underwriting standards that can put pressure on its credit profile. Fitch would also consider negative rating action on SB in case of a substantial and sustained decline in asset quality that may exert pressure on its capitalisation. The subordinated debt rating will move in tandem with the long-term rating. Established in 1986, SB ranks as the fifth-largest local commercial bank in Sri Lanka. SB’s single-largest shareholder is Vallibel One PLC (VO), an investment holding company with 14.97% of the bank’s voting equity at end-H113.