Fitch affirms HSBC Sri Lanka at ‘AAA’; Outlook Stable

Fitch Ratings Lanka said yesterday it has affirmed HSBC Sri Lanka’s (HSBCSL) National Long-Term rating at ‘AAA(lka)’ / Stable  Outlook.

The rating reflects the financial strength of the Hong Kong and Shanghai Banking Corporation Limited (HKB; ‘AA’/Stable), given that HSBCSL is a branch and part of the same legal entity as HKB. Thus, Fitch believes that support from the latter would be forthcoming if required, subject to any regulatory constraints on remitting money into Sri Lanka. HKB is rated above Sri Lanka’s sovereign Issuer Default Rating of ‘BB-’/Stable Outlook.

HSBCSL is well integrated into HKB’s operations, through regular reporting to the head office for monitoring of its performance and management of its risk exposures. The branch also benefits from the implementation of the head office’s systems and processes to support its local operations. HKB has demonstrated its support to HSBCSL through capital infusions in the past and the availability of funding lines. Further, the branch complements the group’s broader strategy for the region in light of its strong footprint across Asia. Consequently, Fitch believes that HSBCSL will continue to be of importance to HKB.

The branch’s loan book expanded by 21.4% in 2010 and 16.4% in H111 (six months ended 30 June 2011) to reflect the recovery of private sector credit demand. Investments in government securities remained significant at 40% of assets at H111. Predominant exposure continued to be to the corporate segment (end-2010: 69% of loans). Exposure to the consumer segment (end-2010: 31% of loans) comprised largely credit cards (14% of loans) and personal loans (11% of loans). Credit concentrations persisted at end-2010, but stemmed from exposures to large global and local corporates.

HSBCSL’s asset quality rebounded in 2010, supported by improved macroeconomic conditions and strong credit risk management. Its gross NPL ratio decreased to 3.6% at end-2010 (end-2009: 5.2%) and further to 2.9% in H111. Further, its provisioning policy is more conservative than the regulatory requirement.

The branch’s net interest margins (NIMs) decreased to 5% (annualised) in H111 from 6.3% in 2010, partly reflecting the impact of the regulatory interest rate cap on credit card advances in Q410. Despite this, it continued to maintain strong profitability, due to decreased credit costs and healthy non-interest income.

HSBCSL’s equity/asset ratio increased to 8.8% at H111, after decreasing to 8.5% at end-2010 (end-2009: 10.7%), due to an increase in assets and profit transfers to the head office. Deposits continue to be the primary source of funding for the branch (end-2010: 60%). Foreign currency lending is funded by deposits and funding sourced from the HSBC group (24% of funding at end-2010).

Established in 1892, HSBCSL is Sri Lanka’s largest foreign bank branch and the fifth-largest licensed commercial bank, accounting for 6% of banking sector assets at end-2010. It is the largest issuer of credit cards in Sri Lanka. HSBCSL has a network of 16 branches, located primarily in the Colombo district, and offers a broad range of financial products and services.