RAM Ratings Lanka reaffirms AAA/P1 rating to Standard Chartered Bank – Sri Lanka branch

RAM Ratings Lanka has reaffirmed the respective long- and short-term financial institution ratings of Standard Chartered Bank – Sri Lanka Branch (SCBSL) at AAA and P1; the long-term rating has a stable outlook. The ratings are firmly anchored by the credit profile of Standard Chartered Bank PLC of the UK (SCB-UK) of which the Bank is a branch.

SCBSL is currently the second-largest foreign bank in Sri Lanka, with an asset base of Rs. 84.90 billion as at end-December 2011. It operates as a branch of SCB-UK which is the headquarters of Standard Chartered Bank (SCB). SCB has presence in over 70 markets, with its main focus in the Asian, Middle Eastern and African markets.

The Group’s pre-tax profit grew 10.67% year-on-year to US$ 6.77 billion in FYE 31 December 2011 backed by strong growth in its major markets. SCB-UK is backed by strong capitalisation, funding and liquidity levels. On a related note, despite SCBSL’s miniscule contribution to the Group (pre-tax contribution of less than 1%), past instances attest to the fact that support will be forthcoming from SCB-UK, should the need arise. As a branch of SCB-UK, the Bank’s liabilities are also that of SCB-UK.

Meanwhile, with regard to the derivatives deal that SCBSL and a few other banks had entered into with state-owned Ceylon Petroleum Corporation (CPC), SCBSL has obtained judgment in its favour although this still remains subject to legal proceedings.

The Bank’s asset quality is deemed healthy as reflected in its relatively low gross Non-Performing Loans (NPL) ratio of 1.08% as at end-December 2011 (end-December 2010: 1.97%) due to its focus on top-tier corporates and a strong risk-management framework, anchored by SCB’s global experience. Amid the aforementioned legal tussle, the Bank’s loan growth was relatively flat last year.

In contrast, in 1Q FY Dec 2012, its credit assets grew 28.23% (annualised) to Rs. 51.03 billion as the management resumed lending to deter declining performance. Moreover, SCBSL’s gross NPL coverage remained strong at 104.98% as at end-December 2011 (end-December 2010: 114.98%). The Bank also follows a prudent investment strategy, with its investment portfolio comprising mainly government securities.

Meanwhile, SCBSL’s funding profile is viewed to be healthy, underpinned by its franchise, better-than-peer loans-to-deposit (LD) ratio and a funding base that has a greater mix of lower-cost current and savings accounts (CASAs) than its peers’. The Bank’s LD ratio clocked in at a relatively conservative 75.39% as at end-December 2011 (end-December 2010: 77.24%).

Furthermore, SCBSL’s liquidity compared better than peers’, reflected in the statutory liquid-asset ratios of its domestic business and foreign currency business units: 53.22% and 61.05%, respectively as at end-December 2011 (end-December 2010: 50.36% and 35.76%).

The Bank’s performance is deemed average, with a net interest margin (NIM) in line with those of its peers at 4.34% in FY Dec 2011 (FY Dec 2010: 4.86%); this was due to SCBSL’s low funding cost from the less expensive CASA deposits, which makes up for its lower-than-peer loan yields as a result of a focus on corporate loans. Overall costs had eased in comparison to that of the previous year, which was skewed by a one-off value added tax (VAT) charge; SCBSL’s cost-to-income ratio improved to 51.52% in FY Dec 2011 (FY December 2010: 81.64%).

The Bank recorded a 70.47% y-o-y decline in pre-tax profit to Rs. 3.12 billion in fiscal 2011, skewed by a one-time reversal of provisions that had resulted in exceptional pre-tax profits in 2010. Elsewhere, SCBSL’s tier-1 and overall risk-weighted capital adequacy ratio (RWCAR) came up to 18.92% as at end-December 2011, and its overall RWCAR to 19.14% – well above that of peers. By end-March this year, capitalisation levels decreased owing to loan growth, nevertheless remaining better than peers’ (15.22% and 15.42%).