RAM reaffirms AAA/P1 rating to Standard Chartered Bank Sri Lanka branch
Monday, 16 September 2013 00:00
-
- {{hitsCtrl.values.hits}}
RAM Ratings Lanka has reaffirmed the respective long- and short-term financial institution ratings of Standard Chartered Bank – Sri Lanka Branch (SCBSL) 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. 99.05 billion as at end December 2012. It operates as a branch of SCB-UK which is the headquarters of Standard Chartered Bank (SCB). 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 grew 1.05% year-on-year to US$ 6.88 billion in FYE 31 December 2012, backed by strong 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.
Meanwhile, the derivative transaction that SCBSL had entered in to with the State-owned Ceylon Petroleum Corporation (CPC), and the subsequent fine imposed by the Central Bank of Sri Lanka (CBSL) of Rs. 27 billion on the bank for alleged exchange control violations, has been commercially settled. The bank’s asset quality is viewed as healthy owing to its stringent underwriting and risk management standards, conservative investment strategy and healthy coverage levels. SCBSL’s credit assets grew 17.86% y-o-y in fiscal 2012 while its gross Non-Performing Loans (NPLs) ratio clocked in at 0.43% as at end- December 2012 (end-December 2011: 1.08%). The ratio compared better to 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, RAM Ratings Lanka’s 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 254.36% as at end-December 2012 (end-December 2011: 117.95%). 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 (NIM), cost to income ratio and Return On Assets (ROA). The bank’s NIM widened to 6.26% in FY Dec 2012 (FY Dec 2011:4.87%) due to the channelling of funds to higher-yielding credit assets coupled with increasing interest rates at the time and lower funding costs from less expensive Current- And Savings-Accounts (CASAs).
SCBSL’s cost-to-income ratio improved to 37.02% y-o-y in FY Dec 2012 (FY Dec 2011: 49.41%), supported by increased gross income. The ratio was better than peers’, owing primarily to the bank’s limited branch network. SCBSL’s pre-tax profit increased 65.13% y-o-y to Rs. 5.26 billion in fiscal 2012, which translated into an ROA of 5.68% (fiscal 2011: 3.84%). Although the bank’s performance had moderated in 1Q FY Dec 2013, RAM Ratings Lanka expects 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 (LD) 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 78.14% as at end-December 2012 (end-December 2011: 75.25%).
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 56.92% and 65.29%, respectively as at end- December 2012 (end-December 2011: 54.98% and 61.05%).
SCBSL’s capitalisation levels are in line with those of its peers. Its tier-1 and overall Risk-Weighted Capital Adequacy (RWCAR) ratios reduced to 16.42% and 16.64% as at end-December 2012 (end-December 2011: 18.92% and 19.14%) due to increased loan growth. The bank’s capitalisation levels remained relatively unchanged as at end-March 2013 at 16.34% and 16.55%, respectively.
