Fitch Revises Sanasa Development Bank’s Outlook to Positive; Affirms at ‘BB+(lka)’
Posted on October 22nd, 2012

Fitch Ratings Lanka Limited Colombo 01, Sri Lanka

Fitch Ratings-Colombo/Seoul/Singapore-22 October 2012: Fitch Ratings Lanka has revised Sanasa Development Bank’s (SDB) Outlook to Positive from Stable. The agency has simultaneously affirmed SDB’s National Long-Term Rating at ‘BB+(lka)’.

The revision of the Outlook reflects SDB’s improved credit metrics, which are now more in line with those of higher-rated peers. SDB’s rating continues to reflect its healthy capitalisation relative to peers, high net interest margins (NIMs), improving asset quality, and effective management of its core business – micro finance (MF) lending.

Improvements to SDB’s financial profile, including maintaining its capitalisation and asset quality, while continuing to focus on its core expertise of MF lending may lead to an upgrade. Conversely, deterioration in asset quality and capitalisation levels could result in its Outlook being revised to Stable, while a significant deviation in lending practices away from SDB’s core expertise of MF lending leading to a weakened risk profile could result in a downgrade.

Lending is concentrated on MF, with housing and property loans accounting 65%, leasing 11%, pawn broking 12%, and lending to Sanasa societies and unions 6%. Loans are generally small ticket loans with an average tenor of one to three years. Loans grew 12% in H112 and 32% in 2011, driven by branch expansion.

Fitch expects NIMs to improve, after a decline in H112, as loans are re-priced. SDB’s NIMs remain high relative to peers, reflecting its traditional focus on micro lending which generates high yields. NIMs decreased to 8.4% at end-H112 from 9.7% in 2011 due to increased funding costs. The bank’s pre provision return on assets decreased to 2.7% in H112 (2011: 3.6%), due to losses at some branches, but remains in line with peers.

SDB has been able to manage the quality of its loans despite MF borrowers being more sensitive to economic cycles. However, non-performing loans (NPLs) could increase through the bank’s exposure to the agriculture sector (13% of total loans) as the prevailing drought takes its toll on its MF borrowers. NPL ratios have been on an improving trend, declining to 4.3% in H112 from 4.4% in 2011 and 5.7% in 2010, while its net NPLs/equity improved to 17.9% at end-H112 (end-2010: 24.5%)

Capitalisation may decline given that following its public listing in May 2012 SDB is no longer allowed to receive its regular capital injections under regulatory requirements. SDB’s Tier 1 ratio has historically remained healthy due to regular capital injections from shareholders and foreign funds. Its Tier 1 ratio and equity to assets ratio decreased to 15.5% and 13.3% respectively at end-H112 from 17.3% and 14.4% at end-2011. Funding is predominantly through deposits, which accounted for 73% of assets at end-H112. The Sanasa Group, consisting of over 8,000 co-operatives, accounted for 30% of total deposits which have a high rollover rate.

SDB was established in 1997 as a licensed specialized bank and a main credit institution for the Sanasa Group. It had 81 branches at end-June 2012.

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