(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
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
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
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