RAM reaffirms Lankaputhra Development Bank’s ratings at A-/P1
Monday, 24 March 2014 00:02
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RAM Ratings Lanka has reaffirmed the respective long and short-term financial institution ratings of Lankaputhra Development Bank (LDB or the Bank) at A- and P1; the long-term rating carries a stable outlook.
The ratings are supported by the bank’s strong capitalisation, funding and liquidity positions and the financial flexibility derived from its sole shareholder, the Government of Sri Lanka (GOSL). On the other hand, the ratings are weighed down by the bank’s weak loan quality and average performance.
LDB is a licensed specialised bank (LSB), incorporated in 2006 which falls under the purview of the Central Bank of Sri Lanka (CBSL). The bank was set up primarily with the objective of implementing the Government’s policy of facilitating small and medium enterprises (SME) which are usually side-lined by other banks which perceive them as carrying a high level of risk.
In addition to extending SMEs with working capital and project loans, the bank also funds GOSL-based development projects.
LDB is fully-owned by the GOSL, through the Ministry of Finance. As such it derives financial flexibility from the GOSL and we opine that the state support would be forthcoming should the need arise. Along with the branch opened during the review period, LDB’s branches increased to 8. However, it remains to be a relatively small sized player in the LSB industry, accounting for approximately 0.94% of industry assets as at end-FY Dec 2012.
The bank’s asset base continues to be dominated by investments in government securities and deposits in state-owned financial institutions. These low-risk investments balance its highly risky loan assets. Although its credit assets have expanded at a relatively moderate pace of 12.53% y-o-y in FY Dec 2012; primarily driven by micro finance loans and pawning, the loan base remained relatively stagnant with a 2.83% (annualised) growth in 9M FY Dec 2013, reflecting the management’s disinclination to lending.
Overall, the company’s gross non-performing loan (NPL) ratio weakened to 44.63% as at end-9M FY Dec 2013 (end-FY Dec 2011: 41.46%) and continued to remain high against similar rated peers. LDB also faces risks associated with the repossession and disposal of collateral owing to its inability to exercise parate rights and the relatively industry-specific nature of collateral. This coupled with its highly concentrated loan portfolio remains a concern. As such, the bank’s loan quality is viewed to be weak.
The bank’s core performance improved in FY Dec 2012, supported by increased yields on its investments in government securities and fixed deposits amid rising interest rates. On the other hand, its interest expenses remained low due to its funding composition, which was dominated by shareholders’ funds and low-cost borrowings. As such, its NIM widened to 9.05% in FY Dec 2012 (FY Dec 2011: 7.97%) and compared in line with its banking peers. Meanwhile, its cost to income ratio improved to 40.23% in FY Dec 2012 from 49.92% in FY Dec 2011 albeit slightly moderating to 42.51% in 9M FY Dec 2013 following the opening of a new branch.
Overall, LDB’s performance is deemed average; its net interest margin (NIM), cost-to-income ratio and return on assets (ROA) were in line with similar rated peers. However, in view of the receding interest rate environment coupled with its conservative loan expansion strategy, the bank’s performance indicators are expected to be subdued going forward.
Meanwhile, LDB’s funding composition remained relatively unchanged. Equity made up the bulk of its funding base, accounting for 59.77% of the mix as at end-9M FY Dec 2013 (end-FY Dec 2012: 62.10%). Borrowings primarily comprised a long-term concessionary USD-denominated loan provided by Kreditanstalt für Wiederaufbau (KfW), a development bank backed by the German Government. Along with its accessibility to funding lines from Bank of Ceylon (BOC), which is the largest state-owned commercial bank in Sri Lanka, the financial flexibility that LDB derives from GOSL is viewed in a positive light. Elsewhere, its statutory liquid-asset ratio clocked in at 951.77% as at end-9M FY Dec 2013 (end-FY Dec 2012: 793.17%), and continued to remain strong.
Although it’s capitalisation levels declined during 9M FY Dec 2013, it remained strong compared to similar rated peers. It’s tier-1 and overall risk-weighted capital adequacy ratio (RWCAR) levels clocked in at 69.64% and 69.99%, respectively as at end-9M FY Dec 2013 (end-FY Dec 2012: 79.89% and 80.23%). Nonetheless, its ability to generate internal capital continues to be pressured by its average performance.
