Fitch affirms Seylan Bank at ‘A-’, Outlook stable

Fitch Ratings Lanka has affirmed Seylan Bank PLC’s (Seylan) National Long-Term rating at ‘A-(lka)’. The Outlook is Stable. A full list of the bank’s ratings is provided at the end of this commentary.

Seylan’s rating reflects Fitch’s expectations of support from the State of Sri Lanka if required, given the bank’s systemic importance. However, the state’s ability to support is limited by the Government’s limited financial ability as evident in its ‘BB-’/Stable’ rating.
Seylan is one of six systemically important domestic banks as identified by the Sri Lankan regulator. Tangible state support was demonstrated since Seylan’s crisis in December 2008, including contributing to two equity injections between 2009 and 2011. During this period a total of Rs. 7.7 billion of equity was injected by the state and private investors. At end-June 2012 the state effectively controlled 32% of Seylan’s voting equity.
Seylan’s asset quality has improved significantly since its takeover by new management in 2009. The value of non-performing advances (NPA) has reduced by 44% between end-June 2009 and end-June 2012, due to the bank’s focused recovery efforts. Together with modest loan growth, Seylan’s NPA ratio improved to 12.34% at end-June 2012 from 29.38% at end-2009.
Seylan’s profitability continues to improve, with return on assets (ROA) increasing to an annualised 1.2% at end-June 2012 (end-2011: 0.62%, which included a one-off provision for voluntary retirement of Rs. 698 million). Higher net interest margin (NIM), despite rising interest rates, and stringent cost controls drove the improvement. NIM improved due to strong recoveries of (mostly legacy) NPAs plus new lending. Fitch expects Seylan’s ROA to improve further over the medium-term despite slower economic activity, as recoveries of legacy NPAs are likely to outstrip new NPA formation.
Despite improving capitalisation since 2010, Seylan’s capacity to absorb future losses is still weak, due to its high unprovisioned NPA/equity ratio. This ratio stood at 56.19% at end-June 2012 (end-2011: 59.39%; end-2009: 158%). While most of this exposure is secured by fixed assets, recovery of such collateral has been slow.
Given its systemic importance in the Sri Lankan banking sector, Fitch does not expect Seylan’s National ratings – which are support-driven – to be downgraded. Rating upside over the medium term could be limited because the bank’s standalone rating remains below its support-driven rating, despite improvements in its processes and controls implemented since 2009.