Fitch affirms Sanasa Dev. Bank at ‘BB+’

Fitch Ratings Lanka has affirmed Sanasa Development Bank’s (SDB) National Long-Term rating at ‘BB+(lka)’. The outlook is stable.

SDB’s rating reflects its modest asset quality and a comfortable equity buffer against future loan losses. The rating also factors in SDB’s exposure to the micro-finance (MFI) niche and the competitive pressures from larger banks moving into this niche.

With an asset base of LKR19bn, SDB is a small licensed specialised bank (LSB). In addition, SDB is not part of the payments and settlements system and is of low systemic importance in Fitch’s opinion. As such, state support cannot be relied upon.

The rating could be upgraded if sustained improvement in SDB’s financial profile and asset quality occurs while accompanied by high internal capital generation. The rating would be downgraded if lending practices significantly deviate from SDB’s core expertise in MFI lending, or if high dividend payouts seriously weaken the bank’s equity/assets ratio.

SDB’s capital adequacy ratio (CAR) remained strong after a series of capital augmentation programmes from 2006 to 2010. The bank plans to list by introduction, as mandated by the regulator, in late 2011 or early 2012. This will increase SDB’s access to capital markets.

SDB’s loan book grew by 15 per cent in H111 and in 2010, with housing loans and MFI-type loans accounting for 48 per cent and 40 per cent of the loan book respectively in H111 (2010: 45 per cent and 44 per cent respectively). The balance part of the loan book was on account of pawning (gold-backed loans). SDB’s housing loans tend to be small ticket, of shorter tenor and mainly for renovations.

SDB’s current accounts-savings account (CASA) ratio was 27 per cent which was above licensed specialised bank (LSB) peers, but still remained a constraint when competing with established licensed commercial banks (LCBs) whose average CASA was 50 per cent. Many LCBs are increasing their presence in the MFI sphere on account of higher yields generated.

SDB has implemented a core-banking system used by AA(lka)-rated LCBs. These robust systems would enable SDB to attract additional multilateral refinance lines where conditions for credit lines often involve stringent due diligence of existing credit processes and systems. The cost escalation due to these system implementations in the near term would increase cost/average assets (2010 and H111 was 5.5 per cent, while five-year historical average prior to 2010 was 4.6 per cent). Fitch expects the bank’s cost/average assets to normalise in the medium term to the historical average as the bank aims to fully utilise economies of scale via its expanded network.  Gross NPLs/Loans reduced to 5.7 per cent for 2010, from 6.4 per cent for 2009. However, SDB has faced some challenges with agricultural loans and MFI loans due to cyclical NPLs, with the June figure rising to 6.2 per cent. Management has in place a field officer MFI recovery structure, which is expected to bring concerted recoveries and target NPL ratios to a figure closer to that of end-2010.

Established in 1997 as an LSB and a main credit institution for the Sanasa movement, SDB is primarily a micro-finance lender.