RAM Ratings Lanka reaffirms Sampath Bank’s ratings at AA/P1

RAM Ratings Lanka 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 capitalisation as well as its good market position.

Although a relatively new bank, with an operating history of less than 25 years, Sampath has emerged as the country’s fourth-largest private-licensed commercial bank, accounting for 6.23% of the industry’s asset base as at end-December 2010.

It is also the country’s sixth-largest LCB, in an industry dominated by two State banks that accounted for around 42.52% of industry assets as at the same date. Sampath’s market position is supported by its wide network of 199 branches and 248 automated teller machines. Looking ahead, the bank intends to further strengthen its geographical reach during fiscal 2011.

In tandem with the expansion in its branch network, the bank has also placed emphasis on tightening its underwriting and monitoring procedures. This is reflected in its improving asset quality; Sampath’s absolute nonperforming loans fell 30.66% year-on-year during FYE 31 December 2010, supported by slower accretion of NPLs and improved recoveries.

This, coupled with a loan expansion of 30.31% during the year, resulted in Sampath’s gross NPL ratio falling to 3.95% as at end-December 2010 – the best among its peers. The ratio further improved to 3.19% as at end- June 2011.

Furthermore, RAM Ratings Lanka notes that Sampath’s gross NPL coverage is the best among its peers, as the bank adopts a more prudent provisioning policy than required by the regulator. As a result, the bank’s credit cost ratio of 0.52% during fiscal 2010 is higher than its similar-rated peers.

Meanwhile, the bank’s performance is deemed adequate; its net interest margin dipped to 5.00% during FY Dec 2010 (FY Dec 2009: 5.30%), before falling further to 4.15% in 1H FY Dec 2011, marginally below its similar-rated peers.

The fall in NIMs is due to intense competition in the industry coupled with the rising cost of funds; Sampath had to rely on more expensive funding options as deposit growth lags loan growth. While the Bank’s absolute costs increased by around 17% y-o-y during fiscal 2010, RAM Ratings Lanka notes that this is due to the addition of new branches during the year. As such, Sampath’s cost-to-income ratio stood at 60.80% as at end-Dec 2010, increasing to 66.10% during 1H FY Dec 2011.

However, excluding a one-off gain on the reversal of a provision during the year, the Bank’s cost-to-income ratio would have clocked in at 67.63% during fiscal 2010, slightly above other private LCBs. Overall, the bank saw its pre-tax profits rise 13.22% y-o-y (or Rs. 525.50 million) during the year, supported by its loan expansion as well as a one-off gain on the reversal of a provision made on a foreign-currency bond.

On a separate note, Sampath’s funding and liquidity positions are considered to be good. Deposits continued to account for the bulk of the funding base with an 85.28% share as at end-Dec 2010. Meanwhile, its loan-to-deposit ratio increased to 81.47% (FY Dec 2009: 73.90%), in line with the expansion of its loan books.

The ratio further increased to 85.44% by end-June 2011 but remains in line with its LCB peers. With regards to liquidity, Sampath’s statutory liquid asset ratio eased to 26.29% by end-Dec 2010 (end-Dec 2009: 30.52%) before moderating to 23.74% as at end-June 2011. However, this is still viewed to be sufficient.

Meanwhile, Sampath’s capitalisation is deemed healthy; its tier 1 and overall risk weighted capital-adequacy ratios came in at 10.30% and 12.04% as at 1H FY Dec 2011. Meanwhile, Sampath’s ratio on net NPLs to shareholders’ funds amounted to 6.29% as at the same date, among the lowest in the industry.

RAM Ratings Lanka also derives comfort from the bank’s healthy internal capital-generation rate of 20.38% as at end-Dec 2010, which stands the best among its similar-rated peers.