Fitch revises Sampath Bank’s Outlook to Stable; affirms ‘AA-’

Fitch Ratings Lanka said yesterday it has revised Sampath Bank PLC’s (SB) Outlook to Stable from Positive. Its National Long-Term rating has been affirmed at ‘AA-(lka)’. Fitch has also affirmed SB’s subordinated debentures at ‘A+(lka)’.

The Outlook revision reflects the weaker-than-expected build-up of SB’s core capitalisation relative to higher rated peers and the need to achieve a sustainable improvement in the bank’s core profitability by improving its funding structure and operating scale.

The ratings reflect SB’s strong asset quality supported by structural improvements initiated in 2009, its high loan loss reserves in a local context, and its growing franchise in terms of its market share of banking sector assets, loans and deposits.

The ratings may be upgraded if the bank were to able to sustain its core capitalisation levels on par with higher rated peers, alongside an improvement in core profitability and the achievement of an enhanced franchise, while maintaining strong asset quality.

Conversely, a rating downgrade may stem from an increase in the bank’s risk appetite that may pressure its asset quality and capital profile.

Fitch expects SB’s core capitalisation to remain above the regulatory minimum but below that of higher rated commercial bank peers. Equity/assets decreased to 8.1% at H112 from 8.4% at end-2011 and 9.0% at end-2010 alongside strong lending. Its core capital adequacy ratio stood at 10.96% at H112 and 10.47% at end-2011. Management indicates that internal earnings retention will remain the main source of equity accretion.

SB has continued to sustain its strong asset quality compared with most commercial bank peers’ (gross non-performing loan (NPL) ratio: 2.5% at H112) through tighter credit controls and from the presence of minimal NPLs on its pawning (gold-backed) advances portfolio (22% of loans at end-2011).

Specific provision coverage remained high in a local context at 73% of NPLs at H112. Fitch, however, believes that asset quality risks could emanate from the more interest-sensitive consumer/retail and SME customer segments and sectors such as imports and exports which are susceptible to external sector pressures.

Fitch expects the pace of lending at SB in 2012 to be limited through the credit ceiling imposed by the regulator but remain close to the 23% upper limit. This is in contrast to the rapid loan expansion (2011: 36%; 2010: 30%) that exceeded that of the sector since the bank embarked upon its expansion drive in 2009. The loan book is likely to remain mainly exposed to the consumer/retail segment (52% at end-2011).

Established in 1986, SB is the fifth-largest domestic bank in Sri Lanka, accounting for 5.9% of banking sector assets at end-2011 and operating through a network of 206 branches.