Fitch Ratings Lanka has affirmed National Savings Bank’s (NSB) ‘AAA(lka)’ National Long-term rating. The Outlook on the rating remains Stable.
The rating reflect s the full state ownership of the bank, low credit risk on its assets due to its significant exposureto government securities and the explicit government guarantee on deposits.

Fitch also draws comfort in NSB’s strong deposit mobilizing franchise in the retail space, although its flexibility to mobilize deposits through competitive interest rate changes is limited due to the significant exposure to lower yielding government securities.

The NSB Act stipulates that the bank invests a minimum of 60% of deposits in government issued or guaranteed securities. Consequently, exposure to government securities was significant at 68% of total assets at FYE06. Loans accounted for only 19% of total assets at FYE06 - loans to banks and other financial institutions, loans against deposits and gold-backed loans accounted for 10% of total assets as at FYE06 while housing loans accounted for 7% of total assets as at FYE06.

The bank’s gross non-performing loan ratio was relatively low at 1.2% at FYE06.

NSB has a significant exposure to interest rate risk due to fixed rate government securities of longer tenures being funded by short-term deposits that reprice much faster. A rising interest rate environment has resulted in a reduction of net interest margins (NIM) to 3.0% in H107 from 3.4% in FY0 5 and FY06. Profitability, as measured by return on assets (ROA), decreased to 0.7% (annualised) in H107 and 0.8% in FY06 from 1.0% in FY05 due to falling NIMs, an increase in personnel expenses and increased taxes. The bank intends to increase the scope of its lending activities to counter declining margins.

NSB’s Tier 1 and total capital adequacy ratios were 41.4% and 12.4%, respectively, at FYE06 due to its high exposure to government securities which attract a zero risk weight, although equity to assets was relatively low at 5.4% at H107. Fitch believes that t he bank’s capital formation is likely to be constrained due to taxes – amounting to 58% of FYE06 pre-tax profit - and a compulsory contribution to the consolidated fund amounting to 52% of FYE06 post-tax profit.

NSB is a fully state-owned Licensed Specialised Bank established in 1972 under an act of parliament by amalgamating the Ceylon Savings Bank, the Post Office Savings Bank, the Savings Certificates of the Postmaster General and the National Savings Movement. NSB is the fourth largest bank in Sri Lanka in terms of assets, accounting for 10.5% of banking system assets at H107. It also has a strong customer franchise in deposit mobilization, accounting for 13.7% of the banking system deposits at H107.

A credit update 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.
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