Fitch affirms Citibank N.A. Colombo Branch at ‘AAA’; Outlook Stable

Fitch Ratings Lanka yesterday affirmed Citibank N.A. — Colombo Branch’s (CitiSL) National Long-term rating at ‘AAA (lka)’. The Outlook is Stable.

CitiSL’s rating reflects Citibank N.A.’s (Citibank) financial strength, of which CitiSL is a branch and part of the same legal entity. Citibank is rated ‘A+’/Rating Watch Negative, which is higher than the sovereign’s foreign currency Issuer Default Rating of ‘B+’/Positive Outlook.

CitiSL follows the group’s global credit policy with significant oversight from Citibank’s regional operations, particularly India and Hong Kong.  CitiSL has traditionally focused on loans to multinationals and the larger local corporates.  Due to the higher concentration in its loan book and the shorter tenure of loans (typically under one-year), its loan portfolio is subject to some fluctuations upon loan repayment.

At FYE09, the 20 largest loans accounted for 84% of total loans (FYE08: 93%). In addition, CitiSL has historically had a sector concentration to the apparel sector — accounting for approximately a third of the loan book. Despite concentration risk however, the bank’s target clientele constitute relatively better credits, which has translated into historically lower credit risk.

In FY08, CitiSL crystallised in full dues on oil hedging derivative contracts, due to non-payment by a counterparty. Thereafter, this exposure was transferred in full to Citibank NY’s book in May 2009 from that of CitiSL.

CitiSL’s net interest margin improved to 6.5% in 9M10 (end-September 2010) from 5.5% in FY09, largely on account of funding costs reducing faster than lending rate adjustments.

As such, CitiSL’s return on assets (ROA) remained strong at 2.4% in 9M10 (FY09: 2.9%). Taxation reductions to the banking system as proposed by the government would benefit CitiSL’s ROAs.

CitiSL’s capital has historically remained strong. Its core and total capital adequacy ratios were high at 22.5% and 22.9%, respectively, at Q310 (FYE09: 40.2% and 40.6%). In addition, equity/assets ratio was 31.4% at Q310 (FYE09: 37.8%), which was well above peer ratios. Over FY05-FY08, CitiSL’s equity/assets ratio averaged 18%, as such, Fitch expects CitiSL’s comparative ratios in 2011 and 2012 to move towards this historical average as loan growth picks up pace. The bank’s zero NPL position at Q310 and FYE09 meant that the net NPL/equity ratio was zero in both periods. CitiSL’s capital should remain strong, boosted by high profitability and the branch’s low risk appetite.

Citibank established local operations in 1979, and operates through a single branch. CitiSL is Sri Lanka’s third largest foreign bank.