Friday, 3 October 2014 05:22
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Fitch Ratings Lanka has affirmed Sri Lanka-based Seylan Bank PLC’s (Seylan) National Long-Term Rating at ‘A-(lka)’. The Outlook is Stable. Fitch has also affirmed Seylan’s senior unsecured debentures at ‘A-(lka)’ and subordinated debt at ‘BBB+(lka).
Key rating drivers – national rating and debt
Seylan’s rating is driven by Fitch’s view that the Sri Lankan State (BB-/Stable) would provide extraordinary support to the bank, in case of need, because of its systemic importance. The Sri Lankan regulator has identified Seylan as one of six systemically important domestic banks. However, the state’s ability to support the bank, if needed, is limited as reflected in the sovereign’s ‘BB-’ rating.
Seylan’s recovery efforts have resulted in a significant improvement in its reported gross non-performing loan (NPL) ratio to 10.9% at end-1H14 from the peak of 29.7% at end-2009. However, the amount of Seylan’s NPLs continues to be high compared with higher-rated peers. This is mostly due to large legacy NPLs on which recoveries have been challenging. Seylan’s ratio of unprovided NPLs to equity remains weaker than higher-rated peers.
Seylan’s loan book fell 2.6% in 1H14, reflecting the lower credit demand from the private sector that has hurt loan growth across the banking sector. Profitability in 1H14 was supported by one-off bond gains, which offset the contraction in net interest margin and the higher loan impairment charges that were seen across the sector. Seylan’s cost efficiency has improved, although costs still remain high.
The bank ranked as Sri Lanka’s sixth-largest domestic commercial bank in terms of assets at end -2013. Seylan experienced a crisis in 2009 that prompted regulatory intervention.
Seylan’s senior unsecured debentures are rated at the same level as its National Long-Term Rating as they constitute unsecured and unsubordinated obligations of the company.
Its subordinated debentures are rated one notch below its National Long-Term Rating to reflect their subordination to senior unsecured creditors.
Rating sensitivities – national rating and debt
Fitch does not expect Seylan’s National Ratings to be downgraded as support to Seylan is expected to continue given the bank’s systemic importance.
An upgrade of Seylan’s rating would be contingent upon its standalone rating moving above the support-driven rating through a significant and sustained improvement in asset quality and provisioning while maintaining other credit metrics in line with higher-rated peers.
The debt ratings will move in tandem with Seylan’s National Long-Term Rating.
