Fitch affirms Standard Chartered Bank Sri Lanka at ‘AAA’; Outlook stable

Fitch Ratings Lanka has affirmed Standard Chartered Bank, Sri Lanka Branch’s (SCBSL) National Long-Term Rating at ‘AAA(lka)’. The Outlook is Stable.

SCBSL’s rating is at the highest of the national rating scale and reflects the credit profile and financial strength of its parent Standard Chartered Bank PLC (SCB). The rating is tied to SCB’s Issuer Default Rating (IDR) of ‘AA-’/Negative, given SCBSL’s legal status as a branch of SCB and that both are part of the same legal entity. SCB’s rating is higher than Sri Lanka’s IDR of ‘BB-’/Stable.

SCBSL has appealed against a Rs. 27 billion fine imposed by the Exchange Control Department, which exceeds SCBSLs equity, for the alleged violation of exchange control laws. Fitch considers it extremely likely that, in the event the fine is enforced, SCB will provide timely support to SCBSL to pay the fine, as well as to meet depositor and creditor obligations. However, support could be subject to regulatory restrictions in remitting money into Sri Lanka although Fitch currently sees this as a remote prospect. Adverse changes to such transfer and litigation risks leading Fitch to revise its expectations of parental support could be negative for the rating.

Profitability, measured as pre-provision return on assets, increased to 5.5% (annualised) in H112 from 4.2% in 2011, and is comparable with that of the sector. This was largely due to high net interest margins driven by rising interest rates and foreign exchange income as seen across the sector. SCBSL’s low provisioning costs and tight cost structure further contributed to strong profitability.

SCBSL’s gross non-performing loans (NPL) ratio improved to 0.4% at end-H112 from 1.1% at end-2011, largely due to write-offs and recovery of NPLs. The majority of the NPLs were driven by the non-corporate sector which accounted for 86% of NPLs, including credit cards.

Loans and advances increased 5% in H112 (2011: 2%) with SCBSL focusing on lending to existing large customers. Some exposures booked at the branch involve borrowers who are guaranteed by other branches. Wholesale lending comprised 77% with the balance in consumer lending in the form of credit cards (7% of advances) and personal loans (11% of advances).

Operating in Sri Lanka since 1892, SCBSL is Sri Lanka’s second-largest foreign bank branch and has a network of 10 branches. SCBSL accounted for 0.1% of SCB’s total assets as at end 2011.