Lanka Rating Agency reaffirms Sampath Bank’s ratings at AA/P1
Tuesday, 4 November 2014 01:51
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Lanka Rating Agency has reaffirmed Sampath Bank PLC’s long- and short-term financial institution ratings at AA and P1 respectively. The long-term rating carries a stable outlook.
The ratings are supported by the bank’s healthy asset quality and good market position. On the other hand, the ratings are tempered by the bank’s average capitalisation. However, Lanka Rating Agency concerns are heighted upon the tempered performance indicators of the bank’s net interest margin and cost to income ratio.
Incorporated in 1986 as a licensed commercial bank, Sampath accounted for 7.61% of the industry’s asset base as at end-December 2013. The bank continues to maintain its position as the fifth-largest LCB and third largest private LCB in an industry dominated by two State banks that accounted for around 42.30% of industry assets as at the same date.
Sampath’s market position is supported by its wide network of 212 branches and 274 Automated Teller Machines as at end December 2013, and increased to 215 branches and 282 ATMs by end June 2014.
Overall, Sampath’s asset quality is viewed as healthy owing to a gross Non-Performing Loans ratio that compares better to that of its peers, a prudent provisioning policy and stringent underwriting and monitoring procedures.
Despite a 24.56% year-on-year expansion in credit assets in FYE 31 December 2013, the bank’s absolute gross NPLs also increased 59.86% y-o-y, due to the increased in new NPLs from the bank’s pawning segment. Consequently, Sampath’s gross NPL ratio had increased to 2.52% as at FY Dec 2013 (FY Dec 2012: 2.07%).
In 1H FY Dec 2014, the bank’s gross NPL ratio improved to 2.39%, supported by the bank’s recovery efforts and its continuous efforts to reduce its exposure of its pawning portfolio. While Lanka Rating Agency acknowledges its better underwriting standards as seen in the slower accretion of new NPLs in fiscal 2014, Sampath’s loan portfolio has yet to season due to higher than industry credit growth seen in fiscal 2013, while delinquencies may rise on its unseasoned loan portfolio.
Elsewhere, the bank’s provisioning remained prudent and continued to exceed the regulatory requirement, as reflected in its NPL coverage levels. That said, Lanka Rating Agency draws concern on the increase in delinquencies of the bank’s pawning portfolio in fiscal 2013, yet derives comfort from initiatives taken from the bank to reduce its exposure towards pawning advances.
Overall, Sampath’s performance is deemed average. Its Net Interest Margin was slightly narrower than peers’ while its cost to income remained high against that of other LCBs. The unchanged credit asset growth which was watered-down due to curtailed high yielding credit in the form of its pawning portfolio saw the bank’s NIM decline to 4.51% in FY Dec 2013 (FY Dec 2012: 4.58%). However Lanka Rating Agency notes that while the bank has reduced its exposure to pawning, it is currently focused on other types of high-yielding credit assets.
Sampath’s cost to income ratio stayed relatively high at 59.09% in fiscal 2013 (fiscal 2012: 58.23%) owing to the expansion of its branch network. However, a decrease of 39.31% y-o-y growth in pre-tax profit in fiscal 2013, reflective of the bank’s initiative to increase it impairment charge, that maintained the bank’s high NPL coverage ratio. The impairment charge was reversed in the 1H of fiscal 2014.
Meanwhile, the slowdown in pre-tax profit in fiscal 2013 translated into a reduction in Return on Assets to 1.30% lower than its peers. In 2Q FY Dec 2014, the bank’s NIM contracted to 2.95% amid a slowdown in performance; its cost to income ratio increased to 76.69%. Meanwhile, the bank’s Return on Equity decreased to 16.62% in FY Dec 2013 (FY Dec 2012: 31.80%). Nevertheless, Sampath’s ROE increased to 23.47% in 2Q FY Dec 2014, owing to a reversal in impairment that increased pre- taxed profit 50.47% y-o-y (annualised) to Rs. 3.38 billion.
Going forward, despite the anticipated improvement in core performance, its high cost profile is expected to moderate overall performance. This may translate to an improvement in the bank’s overall indicators.
Sampath’s funding mix remained relatively unchanged, dominated by customer deposits which made up 80.48% of the mix as at end-FY Dec 2013. The bank’s deposit base expanded 23.51% y-o-y, supported by its extensive geographical reach, albeit tilting towards lower cost savings deposits which is due to the low interest rate environment. As such, the proportion of low-cost Current Accounts/Savings Accounts within Sampath’s deposit base moderated to 33.36% as at end-FY Dec 2013 (end-FY Dec 2012: 33.83%). Nevertheless, the ratio further increased to 38.45% in 2Q FY Dec 2014.
Meanwhile, the bank’s loans to deposit ratio had moderated to 89.84% as at end-FY Dec 2013 (end-FY Dec 2012: 88.77%) amid relatively unchanged loan growth. Elsewhere, the Bank’s liquidity position remained adequate; its statutory liquid asset ratio of 27.52% as at end-FY Dec 2013 was in line with peers’ (end-FY Dec 2011: 22.40%).
Sampath’s capital adequacy showed mixed levels as at end-FY Dec 2013, was lower than that of industry peers’. Its tier-1 and overall Risk weighted Capital Adequacy Ratios clocked in at 10.08% and 14.22% respectively, as at end-FY Dec 2013 (end-FY Dec 2012: 11.80% and 13.61% respectively). The better overall RWCAR stemmed from the issue of Rs. 1.5 billion and a further Rs. 5 billion of unsecured subordinated redeemable five-year listed debentures in 2012 and 2013. However, the ratios had moderated to 9.85% and 13.25% respectively, as at end-June 2014 and are expected to moderate further going forward, in view of credit expansion.
Meanwhile, Sampath’s internal rate of capital generation which had reduced to 6.14% at end-FY Dec 2013 (end-FY Dec 2012: 16.94) due to the increased provisioning, however, improved to 18.61% as at end June 2014. Elsewhere, the bank’s net NPL to shareholder funds ratio stood at -10.16% as at end-FY Dec 2013 (end-FY Dec 2012: -10.04%) and continues to be amongst the best in the industry. The rating will be under pressure if the bank’s core performance excluding one-off reversals falls below industry average.
