RAM reaffirms Sanasa Development Bank rating at “BBB” and “P3”
Sanasa Development Bank rating reaffirmed
RAM Ratings Lanka has reaffirmed the respective long and the short-term financial institution ratings of Sanasa Development Bank Limited at BBB and P3.
The long-term rating carries a stable outlook.
RAM says 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.
Following is the full rating release issued by RAM Ratings Lanka
RAM Ratings Lanka has reaffirmed the respective long- and short-term financial
institution ratings of Sanasa Development Bank Limited (“SDB” or “the Bank”),
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 through 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 LKR 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 3-months basis) only inched up 2.79% to LKR 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
Bank to 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 repricing 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 repricing 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 channeling 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 Bank to have better capitalization 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 capitalization, 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’.
