RAM Ratings Lanka assigns AAA/P1 to Standard Chartered local branch

RAM Ratings Lanka has assigned respective long- and short-term financial institution ratings of AAA and P1 to Standard Chartered Bank – Sri Lanka Branch; the long-term rating has a stable outlook.

The ratings are mainly driven by the Standard Chartered Bank PLC’s credit profile, as the Bank is a branch of the Group. The ratings also reflect the Bank’s healthy asset quality, commendable performance, and franchise.

SCB, starting operations in 1892 as a branch of the Chartered Bank of India, Australia and China (founded in 1853), is currently the second-largest foreign bank in the Sri Lankan banking industry. The Bank is a now part of SCP, which had been incorporated in the United Kingdom following the merger of the Chartered Bank of India, Australia and China and The Standard Bank of British South Africa (founded in 1863) in 1969. The Group has almost 1,700 offices in 70 markets.

However, SCP’s focus has been on the Asian and African markets, which accounted for 74.46% of its operating income in FYE 31 December 2009. The Group’s pre-tax profit ascended 12.76% to USD 5.15 billion last year, despite the global economic turmoil. SCP’s asset base remained relatively unchanged at USD 436.65 billion as at end-FY Dec 2009 (end-FY Dec 2008: USD 435.07 billion).

At the same time, the Group posted a tier-1 risk-weighted capital adequacy ratio of 11.5% and an overall RWCAR of 16.5% (end-FY Dec 2010: 9.9% and 15.6%).

SCB’s asset base of Rs. 83.76 billion as at end-FY Dec 2009 constituted less than 1% of the Group’s assets. SCP’s commitment to the Bank has been clearly demonstrated, having injected Rs. 2.53 billion into SCB in 2005 to meet capital requirements, followed by another US$ 107 million in June 2010 to take-over a non-performing asset.

Meanwhile, SCB’s asset quality is deemed healthy, underpinned by its stringent credit standards and creditworthy clients. The Bank can also leverage on the Group’s technical expertise and risk management framework.

SCB mainly focuses on multinational and top-tier Sri Lankan corporates, supported by its international network and franchise. Consequently, the Bank’s loan book is rather concentrated, with its top 20 loans accounting for 63.95% of its loan base as at end-FY Dec 2009.

At the same time, the Bank’s non-performing-loan (“NPL”) ratio stood at 32.25%. However, we note that this includes a derivative deal with Ceylon Petroleum Corporation (“CPC”) which had fallen into past due. Excluding this exposure, the Bank’s NPL ratio would clock in at just 1.88%, well below the industry average of 8.19%.

Notably, SCB has always kept its NPL ratios below the industry averages; we expect this trend to continue. By end-June 2010, CPC’s LKR 18.50 billion of non-performing assets had been transferred to SCP, thus clearing the Bank’s balance sheet.

SCB’s financial performance is considered commendable, with a non-interest margin (“NIM”) that is broader than the industry’s. The Bank’s NIM stood at 5.30% in FY Dec 2009, i.e. stronger than the industry average of 4.59%.

Although the Bank incurred a pre-tax loss of LKR 4.40 billion in FY Dec 2009, this was mainly due to a LKR 9.25 billion provision on the contract with CPC. Excluding this, the Bank’s return on assets and pre-tax return on equity would have reached a respective 5.21% and 34.26%.

As at end-FY Dec 2009, SCB’s tier-1 RWCAR and overall RWCAR only came up to 5.79% and 6.38%, respectively, as the losses arising from its provisioning had eroded its capital. However, these ratios had bounced back to 11.23% and 11.62% by end-June 2010, following the reversal of provisions after the past due derivative receivables had been transferred to SCP.