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June 24 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings Lanka has affirmed Sanasa Development Bank PLC’s (SDB) National Long-Term Rating at ‘BB+(lka)'. The Outlook is Stable.
SDB’s rating continues to reflect its weak asset quality and high net-interest margins (NIM) due to its focus on the higher-risk microfinance business, in which the bank has expertise to manage reasonably well. The rating also captures the bank’s moderate capitalisation and high operating and credit costs, which constrain its profitability.
SDB’s capitalisation has been pressured by weak earnings and high dividend payouts. Its Fitch core capital ratio declined to 13.4% as at end-March 2014 from 14.3% at end-2013. However, its capitalisation remains comparable to some of its higher rated peers.
SDB’s asset quality reflects the susceptibility of its clientele to economic cycles. SDB’s reported NPL ratio increased to 6% as at end-March 2014 from 5% at end-2013.
SDB’s loan book grew by 4.7% in 1Q14 (2013:13.5%) driven by loans to the housing construction segment, which has historically been the bank’s largest exposure. Fitch believes that SDB’s risk profile could deteriorate as it strives to meet the target asset base of LKR100bn, compared with LKR29bn as at end-2013.
Deposits will likely continue to be SDB’s main source of funding with over 31% of deposits being sourced through cooperative societies. This reflects its linkages with the Sanasa microfinance cooperative movement and Fitch expects this is likely to continue to be a stable source of funding for the bank.
The rating could be downgraded if there is a significant deviation in lending practices from SDB’s core expertise of microfinance lending and if the bank fails to sustain its capitalisation at a level commensurate with its risk profile. There may be positive rating action if the bank achieves stronger capitalisation and asset quality while expanding its asset base.