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

Fitch Ratings Lanka has affirmed HSBC Sri Lanka Branch’s (HSBCSL) National Long-Term Rating at ‘AAA(lka)’.The Outlook is Stable.

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

HSBCSL’s National Long-Term Rating is at the highest end of the National Rating scale. A downgrade of HSBCSL rating could result from HKSB’s rating falling below Sri Lanka’s IDR. Any changes to Fitch’s expectation of support from HKSB could be negative for the rating. Management indicates that although Sri Lanka is not among HSBC’s 22 priority markets, as an important network market, HSBC is committed to investing in Sri Lanka.

Fitch expects the pace of lending at HSBCSL to remain close to the 23% credit ceiling imposed by the regulator. Lending remains largely to corporates (70% of loans at end-2011) reflecting the branch’s traditional focus. The remainder comprises the non-corporate sector that includes credit cards (13%).

The branch’s gross non-performing loan (NPL) ratio decreased to 2.5% at end-H112 and end-2011 from 3.6% at end-2010, reflecting an improved operating environment alongside close credit monitoring. HSBCSL’s provisioning policy is conservative, with specific provision coverage of NPLs of 78% at H112 and end-2011.

HSBCSL’s equity/assets ratio increased to 10.5% at end-H112 and 9.7% at end-2011 from 8.5% at end-2010 through the retention of profit. The last repatriation of profit to the head office took place in 2010; such repatriations depend on the bank’s capital requirements each year.  The branch’s net interest margin (NIM) improved to 5.9% (annualised) in H112 after dropping to 5.1% in 2011, reflecting an increase in market interest rates and the lifting of the interest rate cap on credit card loans. In addition, as part of the HSBC group, the branch continues to benefit from low funding costs. Pre-tax return on assets increased to 5.6% (annualised) from 3.7% in 2011, reflecting a rebound in NIM and increased foreign exchange income as seen across the sector.

Fitch notes that although deposits remain the primary source of funding for HSBCSL (54% of funding at end-H112), their share has been decreasing from a high of 71% at end-2007.

Established in 1892, HSBCSL is Sri Lanka’s largest foreign bank branch and the sixth-largest licensed commercial bank, accounting for 5.7% of banking sector assets at end-2011. It is the largest issuer of credit cards in Sri Lanka, accounting for 25% of cards in use and 42% of outstanding credit.