Friday, September 23, 2011

Fitch upgrades Seylan Bank to ‘A-(lka)’

Fitch Ratings has upgraded Seylan Bank PLC’s National Long-Term rating to ‘A-(lka)’ from ‘BBB+(lka)’.
The outlook is stable. A full list of rating actions is provided at the end of this commentary.

The upgrade is driven by the Government’s improved ability to provide support to Seylan if required, as evidenced by Fitch’s upgrade of the Sri Lanka Sovereign rating to `BB-’ on July 18, 2011.

The potential support is based on Seylan’s status as one of six systemically important domestic commercial banks as identified by the country’s regulator.

State support has been forthcoming to Seylan since its failure in December 2008, including two equity infusions totalling Rs 7.7bn. As at June 30, 2011, the government effectively controlled 30 percent of Seylan’s voting equity.

Seylan’s standalone credit profile has improved since the government’s intervention and subsequent recapitalizations, which resulted in a new Board and significant restructuring of the bank’s systems and controls.

However, Fitch views Seylan’s standalone rating to be considerably lower than the current support-driven rating of ‘A-(lka)’, stemming mostly from its still-high unprovided NPL/equity ratio (end-H111: 72%), and weak management information systems that limit effective control.

The bank’s unprovided NPLs are mostly a function of available collateral, the disposal of which is subject to market risk. The management expects the first phase of an IT system upgrade to occur by March 2012.

Seylan’s asset quality continues to improve, helped by management’s strong focus on recoveries and a more conducive economic environment.

At end-H111, NPLs reduced by 32% in absolute terms from their peak at end-H109. Seylan’s NPL ratio (H111: 18.29%) is still high compared with the other domestic private sector commercial banks rated by Fitch (H111: 3.53%), mostly a result of weak credit controls and the bank’s higher risk appetite in the past.

While credit controls are being tightened, Fitch notes that the bank’s risk appetite has moderated post-new management.

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