Fitch upgrades Sanasa Development Bank to ‘BB+’; Outlook Stable

Fitch Ratings Lanka has upgraded Sanasa Development Bank’s (SDB) National Long-term rating to ‘BB+(lka)’ from ‘BB(lka)’. The Outlook is Stable.

The upgrade reflects SDB’s improving capitalisation and sound financial profile relative to peers’.

Significant equity infusions (cumulative LKR1.3 bn) over 2007-2009 have made SDB a well capitalised bank, with a larger equity cushion to absorb potential losses on bad loans. The bank’s profitability ratios continued to be above peers’ due to its exposure to micro-finance (MFI) type clientele and pawning. In addition, its asset quality has historically been above or on par with the banking sector.

SDB is primarily involved in MFI-based lending, routed through the TCCS Movement (Sanasa) and its branch network (FYE09: 38% of loans, FYE08: 37% of loans). Its housing loans and leases accounted for 39% and 12%, respectively, of total loans at FYE09 (37% and 13% at FYE08). The bank also had a sizable pawn broking loan segment (gold-backed loans), which accounted for 11% of loans at FYE09 (FYE08: 12%). The SDB’s loan growth in FY09 was high at 23% (FY08: 32%) albeit from a small base. Much of the loan growth over the last three years was driven by SDB’s increased network expansion with 52 branches at FYE09 (FYE06: 25). Approximately 50% of loans were less than LKR250,000 (USD2,200). In addition, in the rural areas in which SDB operates, pawning is mostly a form of short-term credit for agricultural purposes, while much of the housing loans are small tickets, primarily for extensions and renovations.

SDB’s asset quality was on par with larger licensed commercial banks, mostly in the ‘AA(lka)’-rated category. This is a function of the granular nature of SDB’s loan book and recovery processes. Nonetheless, delinquencies on housing NPLs have tended to move to ‘over 18 months in arrears’ on account of onerous legal proceedings. The bank’s NPL ratio improved marginally to 6.4% at Q310 (FYE09: 6.6%) on the back of loan growth and slower NPL accretion; while its net NPL/equity ratio improved to 29% at Q310 (31% at FYE09) driven by SDB’s improving capitalisation. While Fitch notes SDB’s rapid loan growth and increase in nominal NPLs in 2009, it takes comfort from the bank’s close monitoring and granularity of its loan book. The agency will monitor the bank’s ability to maintain its asset quality commensurate with its rating.

At end-June 2010, SDB reported consolidated Tier 1 ratio of 13.4% (end-December 2009: 15.2%) and total capital adequacy ratio of 14.5% (end-December 2009: 15.8%) which were well above the required regulatory minimum ratios of 5% and 10%, respectively. In addition, 3.5% of its assets at FYE09 (5.6% of assets at FYE08) were on account of a grant from the Canadian Cooperative Association (CCA), which was obtained for MFI lending. Capital repayments on loans disbursed from this grant can be capitalised as per stipulations of the CCA grant. As such, SDB’s capital generation is further strengthened by the existence of this grant.

A sustained improvement in SDB’s credit profile relative to peers’ would add upward pressure on the bank’s rating.

SDB is a licensed specialised bank, established as the apex credit institution of the TCCS Movement (Sanasa). At FYE09, SDB was 75% owned by the TCCS Movement.