RAM reaffirms Sanasa Development Bank’s ratings at BBB/P3; outlook revised to stable
Tuesday, 27 August 2013 00:00
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RAM Ratings Lanka has reaffirmed Sanasa Development Bank PLC’s respective long- and short-term financial institution ratings at BBB and P3. Concurrently, the outlook on the long-term rating has been revised from positive to stable. The revision reflects a trend of weakening asset quality amidst an accretion in non-performing loans as well as the bank’s moderated performance.
The ratings are supported by SDB’s good capitalisation and performance, its average asset quality despite catering to a risky client segment, and its strong rural presence, particularly in micro-finance. However, the ratings are moderated by the bank’s small stature, its target clientele and below-average liquidity position.
SDB is a relatively small licensed specialised bank, accounting for 3.35% of the LSB industry’s assets as at end-December 2012. It operates as the apex financial institution of the Sanasa movement, which is the largest co-operative network in the country, with the objective of catering to the funding needs of the rural community.
The bank predominantly provides micro-financing to the low-income tier of the economy, which usually lies outside the risk parameters of commercial banks. SDB mainly disburses loans to Sanasa members through grassroots-level primary societies, to non-members through the bank’s own group lending scheme under which loans are mutually guaranteed by group members, as well as to small- and medium-sized enterprises.
RAM Ratings deems SDB’s asset quality to be average, underpinned by good collections stemming from the Bank’s group lending system and proximity to its clients through the Sanasa co-operative network. RAM Ratings acknowledges that this has aided it to maintain a better gross NPL ratio than its LSB peers’.
However, its opinion on asset quality is moderated by the risky customer segment that SDB serves and the increase in NPLs reported in both FYE 31 December 2012 (“FY Dec 2012”) and 1Q FY Dec 2013. An accretion in NPLs and slower loan growth had translated into a gross NPL ratio of 5.41% as at end-March 2013 (end-December 2012: 4.60%). Although it expects asset quality to gradually improve as macro-economic conditions improve, its concerns hinge on SDB’s unseasoned loan book.
RAM Ratings opines the bank’s performance to be good, owing to a better-than-peer net interest margin of 8.64% FY Dec 2012 (FY Dec 2011: 9.88%). SDB’s focus on micro-finance has enabled it to charge higher interest rates on loans, thereby allowing it to enjoy wider NIMs. Nonetheless, the bank’s shorter-tenure deposits re-priced faster than loans in an elevated interest-rate environment, moderating its NIM to 7.79% in 1Q FY Dec 2013.
Elsewhere, the bank’s cost to income ratio worsened to 71.35% in FY Dec 2012 (FY Dec 2011: 67.34%), largely due to branch expansion and the implementation of a core banking system. Consequently, its overall pre-tax profit declined 11.18% year-on-year to Rs. 516.50 million. In the near term, we expect performance to improve with lower funding costs as deposits re-price faster than loans. However, SDB’s NIM may come under pressure in the medium to long term amid keen competition in the micro-finance segment as well as the increased focus on the SME segment which yields thinner margins compared to micro-finance.
The bank’s funding composition remained relatively unchanged. Customer deposits dominated the funding base, accounting for 79.70% of the mix as at end-FY Dec 2012. Meanwhile, SDB’s loans to deposits ratio improved to 106.66% as at the same date (end-FY Dec 2011: 110.41%), further improving in 1Q fiscal 2013 to 104.00% as loan growth slowed. As at end-FY Dec 2012, the Bank’s statutory liquid asset ratio stood at 20.27%, marginally above the regulatory minimum of 20%; the ratio was weaker than that of peers. That said, RAM Ratings derives some comfort from the availability of unutilised committed credit lines amounting to Rs. 500 million.
RAM Ratings Lanka deems the bank’s capitalisation level to be good. Its tier-1 and overall risk-weighted capital-adequacy ratios clocked in at 16.08% and 16.35%, respectively as at end-FY Dec 2012. RAM Ratings opines that the bank has sufficient equity cushion to absorb any potential delinquencies and to support the aggressive loan growth foreseen.
