Fitch affirms Seylan Bank’s ‘A-’ rating

Assigns subordinated debt issue ‘BBB+’

Fitch Ratings Lanka last week said it has assigned a National rating of ‘BBB+(lka)’ to the 2007/2012 (Issue 2) unsecured subordinated redeemable debentures of up to LKR1 billion to be issued by Seylan Bank Limited (Seylan).

At the same time, the agency affirmed Seylan’s ‘A-(lka)’ (A minus(lka)) National Long-term rating, as well as the ‘BBB+(lka)’
National rating assigned to the bank’s 2002/07, 2003/08, 2004/09, 2005/10, 2006/11 and 2007/2012 subordinated debentures. The Outlook on Seylan’s ratings remains Negative.

The ratings reflect Seylan’s systemic importance as the fifth-largest Licensed Commercial Bank in Sri Lanka and its established customer franchise However, the rating also factors in the bank’s relatively weak level of solvency and asset quality.

Seylan’s profitability as measured by ROA improved to 1% (annualised) in H107 on account of provision reversals, following a dip to 0.68% in FY06 (0.74% in FY05) due to higher effective taxes (58% of pre-tax profit). Profitability in FY06 was impaired by high provision charges (loan loss
provisions/loans of 1.8%) and high operating costs (cost/income of 60%), which is below its peers.

Meanwhile, the bank’s income from recoveries of bad debts written off and provision write backs accounted for 50% of pre-tax profit in FY06 (41% in FY05) resulting from enhanced recovery efforts.

However, Fitch believes that capital formation through profit retention is likely to be impaired by high dividend payouts (42% in FY06), although the bank has reduced per share dividends.

Loan growth slowed to 2% (annualised) in H107 (14% in FY06) compared to the high growth rate of 21% maintained over the past five years, as the bank continued to focus its attention on recoveries. Seylan’s gross NPLs/gross loans ratio decreased to 10.9% in H107 from 11.5% at FYE06 (13.1% at FYE05), but is nonetheless much higher than that of its peers and the 5.7% system average. The improvement in the ratio was on account of loan growth and a slight decrease in absolute NPLs.

Meanwhile, the bank’s total loan loss provision coverage also increased to 42% at H107 from 40% at FYE06 (37% at FYE05), although this level of provisioning is relatively low.

Following a recent issue of subordinated debt and the inclusion of audited current financial year profits up to May, Seylan’s total capital adequacy ratio (CAR) calculated on a solo basis rose above the regulatory minimum of 10% to 10.47% at H107.

The corresponding core and total CAR on a group basis were 8.59% and 12.64% while equity/assets was 6.5%; an equity infusion of LKR1.045bn through a rights issue of non-voting shares in FY06 raised equity/assets to 6.4% at FYE06 (5.7% at FYE05).

Net NPL/equity improved to 67.5% at H107 from 80.7% at FYE06 (102.8% at FYE05) but is weak in comparison to its peers. Fitch expects the bank’s solvency to remain weak unless NPL accretion is contained and recovery efforts continue to bear results as overall equity formation remains constrained.

Seylan was established in 1987 and expanded aggressively to achieve its present position within the banking industry, accounting for 5.8% of banking system assets at H107. The bank’s promoter, the
Ceylinco group, owns 23% of its voting equity while several employee share ownership trusts collectively own another 27% of Seylan’s voting equity.

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

‘A(lka)’ National ratings denote a strong credit risk relative to other issuers or issues in the same country. However, changes in circumstances or economic conditions may affect its capacity for timely repayment of these financial commitments to a greater degree than for financial commitments denoted by a higher rated category.

‘BBB’ National ratings denote an adequate credit risk relative to other issuers or issues in the same country. However, changes in circumstances or economic conditions are more likely to affect the capacity for timely repayment of these financial commitments than for financial commitments denoted by a higher rated category.

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.