Lanka Rating Agency reaffirms Standard Chartered Bank – Sri Lanka Branch’s ratings at AAA/P1
Wednesday, 22 October 2014 00:00
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Lanka Rating Agency reaffirms the respective long- and short-term financial institution ratings of Standard Chartered Bank – Sri Lanka Branch at AAA and P1. The long-term rating carries a stable outlook. The ratings are firmly anchored by the credit profile of Standard Chartered Bank PLC of the UK of which the Bank is a branch.
SCBSL is the second-largest foreign bank in Sri Lanka, with an asset base of Rs. 110.73 billion as at end-December 2013. It operates as a branch of SCB-UK which is the headquarters of Standard Chartered Bank. SCB has presence in over 68 markets, with its main focus in the Asian, Middle Eastern and African markets.
The Group’s pre-tax profit slowed -11.49% year-on-year to $ 6.06 billion in FYE 31 December 2013, due to the slowdown in growth in its main markets. SCB-UK is backed by strong capitalisation, funding and liquidity levels. On a related note, despite SCBSL’s miniscule contribution to the Group (pre-tax profit contribution of less than 1%), past instances attest to the fact that support will be forthcoming from SCB-UK, should the need arise. As a branch of SCB-UK, the Bank’s liabilities are also that of SCB-UK.
The Bank’s asset quality is viewed as healthy owing to its stringent underwriting and risk a management standard which is in line with global standards, conservative investment strategy and healthy coverage levels. SCBSL’s credit assets slowed to - 7.24% y-o-y in fiscal 2013 while its gross non-performing loans ratio clocked in at 0.71% as at end-December 2013 (end-December 2012: 0.43%).
The ratio compared better than that of peers, in line with its focus on top-tier corporates and a strong risk management framework, anchored by SCB’s global experience. Notably, the Bank’s credit concentration continues to be relatively higher than that of its peers owing to large-ticket loans to top-tier corporates.
However, Lanka Rating Agency concerns in this regard are somewhat mitigated by the credit profiles of the Bank’s clients. Moreover, SCBSL’s gross NPL coverage remained strong at 177.94% as at end- December 2013 (end-December 2012: 254.36%). The Bank also adopts a prudent investment strategy, with its investment portfolio comprised almost entirely of low-risk and highly-liquid government securities.
SCBSL’s performance is deemed to be above average, reflected in its better-than-peer net interest margin, cost to income ratio and return on assets. The Bank’s margins had thinned last year, with the NIM contracted to 5.93% (FY Dec 2012: 6.26%) in FY Dec 2013 as loans re-priced downwards amid the prevalent low interest rates. The margin, however, further narrowed in 2Q FY Dec 2014 to 5.10%, consequent to the Bank investing funds in low-yielding government securities.
SCBSL’s NIMs have been relatively in line with those of its peers, underscored by its low funding costs from less expensive Current Account and Saving Accounts making up for the lower-than-peer yields of its loan portfolio. Concurrently, its cost of funding is expected to decrease, supported by lower interest rates. SCBSL’s cost-to-income ratio eased to 38.70% y-o-y in FY Dec 2013 (FY Dec 2012: 37.02%), resulting from a slowdown in gross income. The ratio was however better than peers’, owing primarily to the Bank’s limited branch network.
SCBSL’s pre-tax profit increased 15.05% y-o-y to Rs. 6.05 billion in fiscal 2013, which translated into an ROA of 5.77% (fiscal 2012: 5.68%). Although the Bank’s performance had moderated in 2Q FY Dec 2014, we expect a gradual improvement as it seeks to expand its portfolio supported by more conducive macroeconomic conditions.
Meanwhile, SCBSL’s funding profile remained healthy, underpinned by its franchise, better-than-peer loans-to-deposit ratio and a funding base that has a greater mix of lower-cost CASA deposits than its peers’. The Bank’s LD ratio clocked in at a relatively conservative 64.73% as at end-December 2013 (end-December 2012: 78.14%).
Furthermore, SCBSL’s liquidity compared better than peers’, reflected in the statutory liquid-asset ratios of its domestic business and foreign currency business units of 57.06% and 32.79%, respectively as at end-December 2013 (end-December 2012: 56.92% and 65.29%). Furthermore, the bank continued to maintain a positive gap in asset-liability maturity mismatches across all maturity periods. The gap as a percentage of interest-earning assets on under one year maturities in FY Dec 2013 was 12.18% (Rs. 10.97 billion) (FY Dec 2012: 8.76%).
The bank’s capitalisation levels are in line with those of its peers. Its tier-1 and overall Risk Weighted Capital Adequacy Ratios reduced to 24.18% and 24.38%, respectively, as at end-December 2013 (end-December 2012: 16.42% and 16.64%) due to decrease in loan growth. The ratios remained relatively unchanged at 24.60% and 24.79%, respectively as at end-June 2014.
