(The following statement was released by the rating agency)
Sept 29- Fitch Ratings Lanka has affirmed DFCC Vardhana Bank Limited's (DVB) National Long-Term Rating at 'AA-(lka)' with a Stable Outlook. The agency has also affirmed the bank's subordinated debentures at 'A+(lka)'.
The ratings reflect Fitch's expectation that support would be forthcoming from its parent, DFCC Bank (DFCC; 'AA(lka)'/Stable), should it be required. DVB is almost fully owned (a 99.1% stake) by and strategically important to DFCC in expanding the group's product offering, and accounted for 36% of group assets at end-June 2011. The two banks share a common franchise, have closely integrated operations, and provide inputs to key decision-making committees of each other. DFCC obtained the necessary regulatory approval to increase its holding in DVB to 100% in 2011.
A reduction in DVB's strategic importance to DFCC or in the latter's shareholding in DVB, or a weakening in the parent's credit profile could place downward pressure on the ratings. The one-notch differential in the rating of DVB and DFCC reflects Fitch's view on the timeliness of support available from DFCC.
DVB's loan growth of 30% in 2010 and H111 was higher than the sector's 15% and 25%, respectively, and was driven by increased corporate loans in 2010 and strong growth in its pawning (gold-backed lending) business in 2011. Corporate lending accounted for 19% of loans in H111, while total retail lending increased to 15% of advances from less than 10% at end-2009. Asset quality also improved, supported by strengthened credit and recovery processes and also benefiting from an improving credit environment.
Gross non-performing loans fell 29% in H111 from their peak in H110 (LKR1.9bn). DVB follows a more conservative provisioning policy than its domestic peers, with a specific loan loss coverage of 64% at end-June 2011, considerably higher than the 42% for the private commercial banking sector (excluding Seylan Bank PLC ('A-(lka)'/Stable)).
Profitability was modest and remained lower than the sector's for 2010-H111, due to high provisioning costs and low non-interest income. Net interest margins (NIMs) narrowed in the same period as DVB increased its exposure to the corporate segment. However, NIMs are likely to widen as DVB expands its retail segment and further winds down its government securities portfolio. The latter fell to 19% of assets in H111 from 46% at end-2009.
Deposit growth accelerated to 8% in H111 (2010: 7%), but remained lower than the 12% growth for the private commercial banking sector. Low-cost demand and savings deposits (29%) account for a lower share of total deposits than the 47% for the sector, resulting in a higher cost of funds. However, expansion in DVB's network over 2010-2011 and recent deposit mobilisation campaigns should support stronger growth in 2011-2012, and help increase the proportion of current and savings accounts.
DVB is a licensed commercial bank. DFCC is a licensed specialised bank and Sri Lanka's only development finance institution.
The latest research on DVB and DFCC is available on www.fitchratings.com and www.fitchratings.lk.