Fitch Ratings last week affirmed the ‘AAA(lka)’ National Long-term rating assigned to The Hongkong & Shanghai Banking Corporation Limited’s Sri Lanka Branch.

The Outlook on the rating remains Stable.
HSBC Sri Lanka (HSBCSL) is a branch of and part of the same legal entity as The Hongkong & Shanghai Banking Corporation Limited (HSBC), which in turn is a fully-owned subsidiary of HSBC Holdings plc, one of the largest bank holding companies in the world. HSBCSL’s rating is linked to HSBC’s foreign currency Issuer Default Rating of ‘AA’ (Positive Outlook) assigned by Fitch Ratings, as well as HSBC’s financial strength.

HSBCSL’s loan growth was strong in FY06 with a year-on-year growth rate of 33.4%, which was above the growth rate of 28.3% recorded by the banking industry. The bank’s loan portfolio was evenly split between corporate and retail loans, which respectively accounted for 51.5% and 48.5% of its portfolio at FYE06.

Asset quality, although still very strong by Sri Lankan norms, is showing some signs of weakening as evidenced by a gross non-performing loan (NPL)/loans ratio of 2.2% at H107, up from 0.97% at FYE06 and 0.91% at FYE05. This deterioration is attributed to increased defaults on credit cards, residential housing loans, and a medium-sized corporate exposure. In the face of unfavourable economic conditions, the bank has since tightened its credit underwriting standards within the consumer banking segment. However, Fitch notes that the bank’s provision coverage of NPLs is good, with specific provisions covering 83.0% of NPLs at H107.
Despite high interest margins of 8.1% in H107 (7.3% in FY06), higher loan loss provisions and losses in the bank’s historically strong foreign exchange operations caused annualised pre-tax ROA to dip to 2.6% in H107 from 5.0% in FY06. HSBCSL’s post-tax profitability in H107 was affected by higher effective taxation of 80%, a sharp increase from 49.0% in FY06.

This caused the post-tax ROA to depress to 0.5% in H107. However, cost containment in FY06 was good with a lower cost to income ratio of 40.8% compared to 47.7% in FY05. This is partly attributed to the staff composition of the bank, with a significant percentage of staff at lower skill levels being recruited on short-term contracts or outsourced.

HSBCSL’s deposits (65.0% of assets at H107) dominates the funding base, even though its contribution has been declining due to increasing borrowings both from within the broader HSBC group, and in a small way (LKR 1.1bn) from the local capital markets through the issuance of senior debt. There is a significant shift evident in HSBCSL’s deposit structure, with time deposits increasing to 62.0% of the deposit base at H107, up from 50.2% at FYE05, due to increased focus on mobilising time deposits.

Overall, capitalisation remains healthy with equity/assets at 10.9% and total capital adequacy ratio at 11.7% at H107, despite the repatriation of profits to the head office.

HSBCSL is the largest foreign bank in Sri Lanka in term of assets and operates 14 branches in Sri Lanka, primarily in the Colombo district.
A credit update report will be available shortly to subscribers on www.fitchratings.com and www.fitchratings.lk

Fitch’s National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated ‘AAA’ and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as ‘AAA(lka)’ for National ratings in Sri Lanka. Specific letter grades are not therefore internationally comparable.