Fitch says DFCC’s Acuity stake disposal yields limited capital boost

Wednesday, 5 February 2025 00:00 - - {{hitsCtrl.values.hits}}

DFCC Bank PLC’s (DFCC, A(lka)/Stable) divestment of its 50% stake in Acuity Partners Ltd., is unlikely to result in a material improvement in its regulatory capital ratios or have any impact on its national rating, says Fitch Ratings.

“We expect the transaction, valued at Rs. 6.5 billion, to improve DFCC’s capital buffers mostly at the bank level,” it added.

Fitch said it estimates this disposal will improve DFCC’s common equity Tier 1 (CET1) ratio by around 100bp at bank level, with a negligible impact at group level. This reflects the reallocation of capital held at APL to the bank. Following the disposal, we expect the capital ratios at the bank level (3Q24: 10.7% – including 1H profit) and group level (3Q24: 11.6% – including 1H profit) to converge. DFCC’s capital buffer remains weaker than its peers in the ‘A(lka)’ category, with its CET1 ratio significantly trailing the peer average of 13.3% (excluding 9M24 profit).

Fitch said DFCC’s capital position is challenged further by high residual credit risk from non-performing loans, estimated at nearly half of its CET1 capital, compared with a peer average of 18%. The CET1 ratio benefits from its holdings in low-risk Government securities (around 30% of assets); however, this advantage could diminish if growth in high-risk-weighted loans outpaces profit retention. DFCC’s 10.2% holding in Commercial Bank of Ceylon PLC (COMB, AA-(lka)/Stable) serves as a latent capital buffer, which could boost the CET1 ratio by an estimated 4pp-5pp based on current market prices, though we do not expect this to occur in the near term.

“In addition, we expect the divestment to reduce DFCC group earnings to a modest degree, as APL contributed an average of about 7% of DFCC’s operating profit over the past four years. Without APL’s contribution, we estimate DFCC’s operating profit/risk-weighted assets ratio to be 20bp-30bp lower. That said, the bank’s envisaged expansion in core banking operations and improving fee income (3Q24: 11.7% of total operating income, FYE2023: 9.6%) are likely to buoy its profitability,” Fitch said.

APL was jointly held by DFCC and Hatton National Bank PLC (HNB, AA-(lka)/Stable). HNB acquired DFCC’s stake in APL on 21 January 2025, and Fitch expects this to have a limited impact on HNB’s CET 1 and profitability.

The Acuity Group provides a range of services including corporate finance, fixed-income securities, stockbroking, margin trading, and venture capital financing.