Monday, 7 October 2013 00:00
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Fitch Ratings Lanka has affirmed Sri Lanka-based Seylan Bank PLC’s (Seylan) National Long-Term Rating at ‘A-(lka)’. The Outlook is Stable. Fitch has also affirmed Seylan’s senior unsecured debentures at ‘A-(lka)’ and subordinated debt at ‘BBB+(lka).
Key rating drivers: Seylan’s rating is driven by the Sri Lankan state’s high propensity to support Seylan under extraordinary circumstances. The regulator explicitly identifies Seylan as one of the six systemically important domestic banks. However, the State’s ability to support the bank, if needed, is limited as reflected in the sovereign’s ‘BB-’/Stable rating.
The bank’s standalone credit profile has improved significantly since 2009, although it is still weaker than the support-driven rating, stemming from its weak asset quality and weaker solvency ratio compared with its rating peers. Seylan developed a strategic plan in 2012, which included process improvements, systems enhancements, structural changes and business rationalisation. The successful implementation of this plan could support the credit profile of the bank.
Seylan’s Non-Performing Loans (NPLs) continue to be high compared with its peers, largely due to the existence of legacy NPLs stemming from loans disbursed before a crisis in 2009 that prompted intervention and support from regulators. The bank has since then recovered a significant amount of those NPLs, though.
Fitch believes the slowing economic environment could pose challenges to Seylan’s efforts to improve asset quality as NPLs increase across the domestic banking sector. Seylan’s recovery efforts have resulted in an improvement in its regulatory NPL ratio to 11.15% at end-June 2013 from 12.99% at end- 2012 and 14.24% at end-2011.
Its solvency ratio, the amount of NPLs that Seylan has not made provisions for relative to its equity, is significantly higher than its peers’, indicating it is less able to absorb potential losses from the NPLs. The recovery of large legacy NPLs would considerably improve this loss-absorption capacity of the bank.
Improved interest margins, lower impairment costs and lower operating costs during 2012 resulted in higher profitability for the year. Return on assets (ROA) increased to an annualised 1.04% at end-June 2013 from 0.42% at end-2011 (end-2012: 1.18%). However, ROA could come under pressure because of slowing business activity and incremental credit costs, although the bank would benefit from the continuing improvements in cost structures and one-off gains from NPL recoveries.
Rating sensitivities: Fitch expects state support to Seylan to continue given the bank’s systemic importance. Hence, Fitch does not expect a downgrade of Seylan’s National ratings.
An upgrade of Seylan’s rating would be contingent upon its standalone rating moving above the support-driven rating, by way of significant and sustained improvement in asset quality and provisioning while maintaining other credit metrics in line with higher-rated peers.
