Fitch affirms DFCC Bank’s ‘AA’ national rating

Fitch Ratings Lanka last week affirmed the ‘AA(lka)’ National Long-term rating assigned to DFCC Bank (DFCC) in addition affirming the ‘AA(lka)’ National Rating assigned to the bank’s senior debentures and the ‘AA-(lka)’ (AA minus(lka)) National Rating assigned to its subordinated debentures.

The outlook on the ratings is Stable.
DFCC’s ratings reflect its strong financial performance, good asset quality and strong capital position.

The ratings also take into acount the bank’s high exposure to riskier long-term project lending and less diversified funding base.

DFCC’s profitability as measured by return on assets remained strong at 2.6% in FYE07. The contribution from its 29%-owned associate, Commercial Bank of Ceylon Ltd (CB, ‘AA+(lka)’), was a substantial 21% of FY07 net profit, compared to the contribution from other group entities, including its 95%-owned subsidiary DFCC Vardhana Bank Ltd (DVB, ‘AA-(lka)’ (AA minus(lka)), which was 7%.

The Central Bank of Sri Lanka (CBSL) issued a directive that requires DFCC to decrease its voting rights in both CB and DVB to 15% by 2008 and 2012, respectively. As per the directive, failure to do so would result in DFCC’s voting rights being reduced to 10%. However, Fitch does not foresee a significant impact to the bank’s profitability in either event.
The funds channelled through or guaranteed by the Government of Sri Lanka constituted 64% of the bank’s borrowings at FYE07. In addition, Fitch believes that DFCC’s continuing good performance record has enabled it to source long-term funding from international agencies. Nevertheless, some initiatives have been instituted by the bank to diversify funding away from such traditional sources.

The gross non-performing loans (NPLs)/gross loans ratio held steady at 5% in FYE07 due to a robust loan growth of 30% in FY07. However, Fitch notes that the bank’s NPLs tend to swell throughout the year, but recede by the end of the financial year. This has typically been the trend, as more emphasis is placed on the NPL position at the end of the financial year when staff performance evaluation takes place. However, it is noteworthy that DFCC’s NPL classification is more stringent than that prescribed by the CBSL.

DFCC remains one of the more strongly capitalised amongst Sri Lankan banks, reporting an equity/assets ratio of 17.7%, as well as core and total capital adequacy ratios of 17.8% and 15.2%, respectively, at FYE07. Solvency as indicated by net NPL/equity ratio remained comfortable, at 12.3% at FYE07.

DFCC is Sri Lanka’s premier development finance institution engaged in the provision of long-term project finance. The bank was established in 1955 through an Act of Parliament on the recommendation of the World Bank in order to foster economic growth in Sri Lanka. DFCC is regulated as a Licensed Specialised Bank and accounted for about 3% of banking system assets. The bank’s major shareholders include entities related to the Stassens Group which hold 30.7% of its equity and Bank of Ceylon (‘AA(lka)’), which holds 14.7% of its equity.

DFCC has a 1.78% shareholding in Fitch Ratings Lanka but is not involved in either the day-to-day operations of or credit rating reviews undertaken by Fitch Ratings Lanka.

A credit analysis will be available shortly to subscribers on www.fitchratings.com and www.fitchratings.lk

‘AA(lka)’ National ratings denote a very strong credit risk relative to other issuers or issues in the same country. The credit risk inherent in these financial commitments differs only slightly from the country’s highest rated issuers or issues.

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.

Fitch affirms DFCC Vardhana Bank’s ‘AA-’ national rating

Fitch Ratings Lanka last week affirmed DFCC Vardhana Bank Limited’s (DVB) National Long-term rating at ‘AA-(lka)’ (AA minus(lka)). The Outlook on the rating is Stable.

The principal factor supporting DVB’s rating is the strong implied support assumed to be available from its parent DFCC Bank (DFCC/’AA(lka)’). DVB is envisaged to play an important strategic role in DFCC’s future plans. In addition to DFCC’s controlling stake and the use of a common franchise, the operations of DVB are closely integrated with those of DFCC. Hence, Fitch believes that DVB will continue to enjoy a high degree of support from DFCC.

Net profit increased by 80% to LKR116.8 million in FY06 on the back of high loan growth supported by cross selling of loans from DFCC, and healthy net interest margins from DVB’s high exposure to the mid-market customer segment. The contribution from the bank to the overall group increased, but remains low at 7%.

Though the bank’s internal capital generation through profit retention may not be sufficient to satisfy the enhanced minimum capital requirement of LKR2.5 billion imposed on licensed commercial banks (LCB) by the original deadline of end-2007, this requirement should be met as DFCC has indicated its commitment of providing the deficit capital by this deadline. Fitch does not anticipate any difficulty will be experienced in this regard given DFCC’s strong capital position, though it is doubtful that the capital infused could be fully disbursed by DVB immediately.
DVB’s gross NPL/gross loans ratio increased to 5.9% at FYE06, from 3.1% at FYE05 due to a high growth in NPLs during the year.

Consequently, solvency as measured by net NPL/equity deteriorated to 23.6% at FYE06, from 9.1% at FYE05. Fitch expects solvency to improve with the aforementioned equity infusion from DFCC.

The Central Bank of Sri Lanka issued a directive that requires DFCC to decrease its voting rights in DVB to 15% in 2012. Failure to do so would result in DFCC’s voting rights being reduced to 10% as per the directive. However, given a minority holding of only 4.6%, DFCC is likely to retain majority control of the bank.

DVB is a small LCB and accounts for 0.5% of banking system assets, and is a 95.4%-owned subsidiary of licensed specialised bank DFCC. DFCC’s acquisition of DVB was in line with its objectives of diversifying product offering, expanding revenue streams and developing alternate sources of funding.

A credit update will be available shortly to subscribers on www.fitchratings.com and
www.fitchratings.lk
‘AA(lka)’ National ratings denote a very strong credit risk relative to other issuers or issues in the same country. The credit risk inherent in these financial commitments differs only slightly from the country’s highest rated issuers or issues.

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.

Fitch’s rating definitions and the terms of use of such ratings are available on the agency’s public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch’s code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the ‘Code of Conduct’ section of this site.