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Monday, 4 November 2013 00:00 - - {{hitsCtrl.values.hits}}
The revision of the Outlook on SDB reflects an unexpected deterioration in its credit profile. SDB has failed to sustain the improvement in its capitalisation and to maintain its asset quality relative to its higher-rated peers.
SDB’s rating continues to reflect its weak financial profile, which is characterised by moderate capitalisation and high costs which constrain its profitability. The rating also captures its high net interest margins (NIMs) due to its focus on the higher-risk microfinance business which Fitch believes the bank manages reasonably well.
SDB’s capital ratios have been declining since the bank stopped capitalising part of its customer loans following its listing in May 2012 and in the absence of a fresh equity injection. SDB’s Fitch Core Capital and Tier-1 ratios declined to 14.9% and 13.6% in H113, respectively (2012:15.8% and 16%), but they still remain above those of similarly rated peers.
Fitch expects SDB’s asset quality to continue to reflect its main exposure to microfinance customers, who are more susceptible to economic cycles. NPLs (including interest in suspense) increased 41% in absolute terms in H113 to account for 7.9% of gross loans, from 6% in 2012. The reported regulatory NPL ratio stood at 6.2% at H113, up from 4.6% in 2012. The increase in NPLs was largely driven by exposure to the agriculture and construction sectors, which accounted for 41% and 31% of incremental NPLs respectively.
SDB’s large branch network and its extensive reach to its target customer base support its cooperative objectives. Lending remains fairly granular with exposure to the Sanasa group accounting for 6% in H113 (unchanged on 2012). Lending growth decelerated to 3% in H113 from 18.5% in 2012, in line with the slower growth trend in the Sri Lankan banking sector.
Deposits will likely continue to be the main source of funding for SDB. Deposits formed 74% of assets as at H113, and 30% of total deposits were sourced from the Sanasa group.
Rating sensitivities
The rating could be downgraded if there is a significant deviation in lending practices from SDB’s core expertise of microfinance lending, which could elevate its risk profile. The rating is also sensitive to a further deterioration in capitalisation and asset quality relative to peers. Sustainability of stronger capitalisation and asset quality could lead to a positive rating action. However, Fitch does not expect the current decline in these metrics to be arrested over the next 12-18 months.
SDB was established in 1997 as a licensed specialised bank and it is the main credit institution for the Sanasa microfinance cooperative movement. Its branch network stood at 81 units as at end-2012.
