Sept 23, 2010 (LBO) - Fitch Ratings Lanka said it has raised the outlook on Sri Lanka's Sampath Bank (SB) ‘AA−(lka)’ national long‐term rating to positive from stable, indicating a potential for an upgrade in the next 12‐24 months.
"This is based on structural improvements that have occurred within the bank since early 2009, across most spheres of risk management, which, in Fitch’s view, are helping to improve SB’s credit profile faster than that of its peers," a statement said.
An upgrade will be contingent upon the bank’s ability to develop its franchise and achieve greater economies of scale, while maintaining its return on assets, asset quality and capital structure at levels commensurate with a higher rating, Fitch said.
The rating agency noted that SB has managed the recovery of its non-performing loan (NPL) stock better than most of its peers.
NPLs reduced by 23 percent on an absolute basis in the 12 months to end‐June 2010, due to concerted recovery efforts.
"The bank expects further reductions in absolute NPLs, owing to its continued efforts and an improving macroeconomic environment," Fitch Ratings said.
Strong recoveries, along with an increased share of pawning advances - gold‐backed lending, which has zero NPLs - helped reduce gross NPLs to 6.91 percent of loans at the end of the second quarter of 2010 from 7.60 percent at end‐2008.
However, the bank's gross NPL ratio excluding pawning was higher at 8.71 percent.
"In a prudent move in the first half of 2010, the bank provided for 18 percent of its NPLs ignoring the value of collateral held (26 percent of pre‐provision profits)," Fitch Ratings said.
Pawning increased to 21 percent of loans at the end of the first half of 2010 from 11 percent at end‐2007.
"Consequent to SB’s expansion drive, the bank’s assets funded by low‐cost deposits have also increased, benefiting its cost of funds," the rating agency said.
"This, along with greater margins on pawning, NPL recoveries and operating cost containment, helped improve ROA (return on assets) to an annualised 1.66 percent at the end of the second quarter from 1.09 percent at end‐2008."
Fitch noted that the increased proportion of pawning advances exposes SB to a heightened level of market risk.
"However, this is somewhat mitigated by the fact that SB’s average loan‐to‐value ratio on pawning was a moderate 76 percent at 15 August 2010, and that historically an average of only 2‐3 percent of its pawning portfolio has had to be auctioned off due to repayment delays."
Fitch said Sampath Bank is in a "fairly aggressive" expansion and optimisation of its branch network, with soft targets of 175 and 200 branches by end‐2010 and end‐2011, mostly outside the capital Colombo, in relatively under‐banked areas.
Sampath Bank's single largest shareholder is Dhammika Perera, a local businessman with almost 15 percent ownership, who has diverse holdings in local corporates, including other banks and non‐bank financial institutions.
source - www.lbo.lk
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