LRA assigns A/Stable/P1 rating to Regional Development Bank

Tuesday, 18 November 2014 00:17 - - {{hitsCtrl.values.hits}}

Financial entity plans Rs. 2.5 b five year listed debenture LRA has assigned Pradeshiya Sanwardhana Bank’s (Regional Development Bank, RDB or the bank) respective long- and short-term financial institution ratings at A and P1. Meanwhile, the long term rating of the company’s proposed Listed Unsecured Subordinated Redeemable Debentures (2014/2019) of Rs. 2.5 billion is to carry an issue rating of A- indicative of a one notch difference due to the subordinated status of the debt. The outlook on both the long-term ratings is to carry a stable outlook. RDB’s ratings are anchored by its state ownership; the bank had been created by the GOSL as part of a broader policy initiative to facilitate the overall regional economic development of the country by promoting the development of agriculture, industry, trade, commerce, livestock, and fisheries activities and empower financing development projects serving to the needy sectors of the economy. Meanwhile, the bank’s asset quality and financial performance metrics are considered to be above average in relation to peer Licensed Specialised Banks. The ratings are weighed down by the company’s deteriorating capitalisation which however, is expected to improve with the issue of the subordinated debenture of Rs. 2.5 billion. The beginnings of Regional Development Bank can be traced to 1985 when district level banks under the category of Regional Rural Development Banks were established in terms of the Regional Rural Development Bank act No 15 of 1985. Subsequently in 1997, under the Regional Development Bank act no 06 of 1997, seventeen Regional Rural Development Banks were amalgamated in to six provincial development banks; Rajarata, Ruhuna, Wayamba, Kandurata, Uva and Sabaragamuwa Development Banks. With the introduction of the Pradeshiya Sanwardena Bank Act No 41 these six banks were merged in to one national entity as Pradeshiya Sanwardhana Bank (Regional Development Bank) on 1 May 2010. RDB’s asset base expanded at a Compound Annual Growth Rate (CAGR) of 19.11% from FY Dec 2010 to FY Dec 2013. Net Loans and advances for the corresponding period grew at a CAGR of 17.65%. In view of slower credit growth in FY 2013 and 1H FY 2014 the proportion of net loans and advances within the asset mix declined to 76.78% and 66.08% respectively. Meanwhile, as a result of overall reduced demand for credit and the setbacks related to gold-backed lending across the industry, RDB’s net loan growth slowed to 10.49% y-o-y in FYE Dec 2013 and -3.84% in 1H FY 2014 (FYE Dec 2012: 18.04%). The phenomenon was exacerbated by adverse weather patterns which affected the rural farming community of the country; RDB’s most prominent customer segment. As at end-June FY 2014, RDB’s gross NPL ratio worsened to 12.83% due to accretions stemming from the pawning portfolio. The delinquency of the pawning portfolio increased to 20.82% as a percentage of total pawning advances while short and medium term loan delinquency ratios also chartered an increase. Lanka Ratings attributes the high gross NPL ratio of the bank to its rural development focus with adverse weather patterns affecting agriculture in fiscal 2013 and 1H FY 2014. Going forward, the overall NPL’s are expected to reduce with sustained recovery efforts, improving macroeconomic conditions, increasing loan growth and the reduction in the overall pawning portfolio. RDB’s Net Interest Margin (NIM) declined to 6.29% in FYE Dec 2013 (FYE Dec 2012: 7.15%), driven by the receding interest rate environment. However, NIM’s increased within 1H FY 2014 to 6.68% as customer deposits re-priced in line with credit assets. The bank’s performance is deemed average in comparison to peer performance indicators. The bank’s NIM and cost-to-income ratio compare well with LSB industry peers. Going forward, we expect NIMs to be in line with current levels in the short term, with overall performance expected to improve in line with macro-economic fundamentals and development within the agriculture sector. RDB’s deposits accounted for 83.25% of the funding mix as at FYE Dec 2013. The bank’s deposit base has grown at a Compound Annual Growth Rate (CAGR) of 18.17% over the period 2010-2013. RDB began with a base of Rs. 37.9 billion in 2010 and as at end-June 2014 had Rs. 68.5 billion worth of customer deposits. In view of the fact that deposit growth had largely stemmed from high-cost time deposits, the proportion of low-cost CASA (Current Account and Savings Account Deposits) in the bank’s deposit mix stood at 26.44% as at FYE Dec 2013 improving from 23.57% in FYE Dec 2012. The increased focus on mobilising savings deposits in 1H FY 2014 paid rewards whereas savings grew by 22.59% (annualised) with the overall deposit portfolio increasing from 62.6 billion to Rs. 68.6 billion. Concurrently, the CASA ratio increased to 26.86% as at end-June FY 2014. Elsewhere, the bank’s loans to deposit ratio continued to improve to 87.61% in 1H FY 2014 (FYE Dec 2013: 99.30%, FYE Dec 2012:102.55%), on the back of deposit growth outpacing credit growth. Meanwhile, RDB’s statutory liquid-asset ratio clocked in at 25.51% as at FYE Dec 2013 (FYE Dec 2012: 23.30%),further improving to 35.70% at end-June 2014 as funds were held as fixed deposits in other state banks amidst slower credit growth. As at end-June 2014, the bank’s tier I capitalisation level was above the regulatory minimum at 9.40% (FY 2013:10.98%), however with the adverse effects of pawning infections on shareholder capital the overall RWCAR chartered a decline and fell below the regulatory minimum to 9.83% as at end-June 2014. Therefore, RDB plans to raise the additional capital requirement through a 5 year subordinated debenture of Rs. 2.5 billion. The debt issue is expected raise the Total RWCAR Ratio above the regulatory minimum of 10%.