Dec 29, 2010 (LBO) - Fitch Ratings has confirmed the National Long-term rating of Sri Lanka's Housing Development Finance Corporation Bank (HDFC) at 'BBB+(lka)' with a stable outlook, a statement said.
The rating agency has also confirmed the 'BBB+(lka)' rating on the bank's outstanding 195 million rupee senior unsecured redeemable debentures.
"HDFC's ratings reflect its demonstrated ability to contain interest rate risk to an extent by re-pricing existing loans, despite the sizeable maturity mismatches between its assets and liabilities," the rating agency said.
The ratings also factor in the government of Sri Lanka's (GOSL) 51 percent ownership of the bank.
It also considered the bank's perceived importance to low- and middle-income housing, sizeable funds derived from the state and related entities, low ultimate credit risk of its housing loans, and inherent limitations in its current business model.
"The ratings could be upgraded if there is a sustained improvement in HDFC's maturity mismatches and sustained higher equity funding, as well as if it continues to re-price existing loans in a rising interest rate environment in a timely manner while maintaining healthy asset quality and profitability."
The opposite of these factors, Fitch said, would result in a rating downgrade.
HDFC's loan growth improved towards the end of 2010 helped by the low interest rate environment and improving credit demand.
Much of the growth stemmed from housing loans backed by borrowers' employee provident fund balances while other loans declined.
"EPF loans are more profitable for the bank, given that they require minimal appraisal and carry virtually no credit risk," Fitch said.
"However, over-reliance on EPF loans could increase pressure on the bank's liquidity, as arrears on such loans are refunded in full only once a year by the EPF."
HDFC expects to improve its competitive position in housing loans backed by mortgages over property to mitigate this, Fitch said.
"The bank's profitability improved in 2010 as net interest margin widened and credit costs eased in an improving economic climate, helped by focused recoveries."
Its return on assets (ROA) improved to an annualised 2.25 percent at the end of nine months, more in line with an average of 2.83 percent between 2000 and 2006, Fitch said.
"The long-term sustainability of ROA will depend upon HDFC's ability to reduce its asset-liability mismatches and keep credit controls in check over the medium-term," the rating agency said.
"This could prove challenging, in particular if much of the incremental growth is deposit-funded, unless market interest rates remain benign."
HDFC's capitalisation (equity/assets) improved to 12.00 percent at the end of nine months in the current financial year, but was still below an average of 16.76 percent between 2000 and 2006.
"In the absence of viable long-term fixed rate funds or re-finance borrowings to fund its housing loan portfolio, HDFC may require a larger equity cushion to reduce potential adverse effects that rising interest rates could pose to its credit profile."
HDFC was established as a building society in 1984, converted into a licensed specialised bank in 2003, and listed on the Colombo Stock Exchange in 2005.
HDFC group assets amounted to 15 billion rupees. The bank has a network of 27 branches, and employs over 400 staff.
source - www.lbo.lk
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