State Mortgage and Investment Bank

ICRA Lanka reaffirms the issuer rating of State Mortgage and Investment Bank

Instrument*Rated Amount (LKR Mn)Rating Action
Issuer ratingN/A[SL]BBB+ (Stable); Reaffirmed

Rating action

ICRA Lanka Limited has reaffirmed the issuer rating of [SL]BBB+ (pronounced S L Triple B plus) with Stable outlook for State Mortgage & Investment Bank (SMIB or the Bank).

Rationale                

The rating factors in SMIB being a 100% Government of Sri Lanka (GoSL) owned Bank, comfortable capital profile and moderate profitability. The Bank’s Tier I and Total capital adequacy ratios (CAR) are comfortable at 18.56% and 19.30%, respectively as of Jun-20 as compared to the regulatory requirement of 8.0% and 12.0%, respectively. The Bank’s minimum core capital remained at LKR 5,075 Mn (excluding the LKR 419 Mn profit for CY2019) as of Jun-20 and it needs to be enhanced to LKR 7.5 Bn by Dec-22 to meet the minimum core capital requirement applicable for Licensed Specialised Banks (LSBs). ICRA Lanka estimates that the Bank would need capital infusion of about LKR 1.6 Bn to meet the regulatory requirement as the internal generation is likely to remain modest. ICRA Lanka expects timely and adequate capital support from the GoSL to meet the capital requirement.

The rating considers SMIB’s moderate profitability with Return on Assets (RoA) and Return on Equity (RoE) of 1.05% and 6.43%, respectively in H1CY2020 as compared to the LSBs sector average of 0.63% and 11.22%, respectively. ICRA Lanka also notes the bank’s weak asset quality profile as the gross NPA ratio, excluding Employees’ Provident Fund (EPF) backed loans increased to 9.23% as of Jun-20 from 7.73% as of Dec-19 (7.31% as of Dec-18) and remained above LSBs sector average of 7.08% in Jun-20.

Outlook: Stable

The Stable outlook reflects high likelihood of adequate and timely capital support from the GoSL given its 100% ownership of SMIB.  The outlook may be revised to “Positive” in case of a steady improvement in its asset quality and profitability indicators. The outlook may be revised to “Negative” in case of a further weakening of asset quality, overall financial risk profile or in case of lower than expected support from the GoSL, specially in meeting the minimum capital requirement on a timely basis.

Key rating drivers

Credit strengths

100% government ownership; SMIB is a 100% GoSL owned LSB, and the Bank has received financial and managerial support from GoSL in the past. The GoSL is represented by three government administrative officers on SMIB’s Board from the Ministries of Finance, Housing and Agriculture. GoSL also infused capital of LKR 250 Mn in 2016 by converting a loan granted by it in the past. ICRA Lanka therefore expects timely support from the GoSL, especially in meeting SMIB’s core capital requirement of LKR 7.5 Bn by December 2022.

Comfortable capital profile; sizeable capital required for meeting minimum regulatory core capital in Dec-22; SMIB has comfortable capital adequacy ratios largely supported by its exposures to EPF loans and mortgage loans (21% and 27%, respectively of the total loans as of Jun-20) which have lower risk weights of 0% and 50%, respectively. The Bank’s Tier I and total CAR stood at 18.56% and 19.30% respectively as of Jun-20, comfortably above the regulatory threshold of 8.0% and 12.0%. SMIB’s core capital was LKR 5,075 Mn in Jun-20 (excluding the LKR 419 Mn unaudited profit for CY2019) which was above the minimum requirement of LKR 5 Bn. As per ICRA Lanka’s estimation, the Bank would require capital support of about LKR 1.6 Bn (27% of the net worth as in Jun-20), assuming 15-25% growth in the risk weighted assets (RWAs), to meet the LKR 7.5 Bn core capital by Dec-22, as its internal generation is expected to remain moderate. However, timely capital support from the GoSL is envisaged to meet the above minimum regulatory requirement.

Credit challenges

Moderate scale of operations; SMIB is a moderate sized LSB with a total asset base of LKR 51.3 Bn and branch network of 24 as of Jun-20. The Bank offers personal loans, mortgage loans and EPF backed loans which accounted for 47%, 27% and 21%, respectively of its LKR 35.3 Bn portfolio as of Jun-20. ICRA Lanka takes note of the increase in the share of non-fixed collateral backed loans in the overall portfolio, as the share of personal loans has stood at 47% as of Jun-20 (45% in Dec-19). However, the granular portfolio and low credit concentration, with top 10 loans accounting for about 1% of the total portfolio as of Jun-20, provides some comfort. As the Bank expands its lending portfolio and diversifies to newer products with large ticket sizes namely Business loans, the concentration risk of the portfolio is expected to increase going forward. However, SMIB’s ability to maintain a granular portfolio and improve the credit quality of the non-fixed collateral back portfolio would be key monitorable.

Weak asset quality indicators; The Bank’s gross NPA ratio stood at 21.73% as of Jun-20 as compared to 21.21% in Dec-19 and 21.75% in Dec-18. EPF loans contribute significantly for the overall high NPA’s, as most borrowers expect the Bank to recover loan liabilities out of EPF balances. Historically, SMIB recorded lower NPAs during the second quarter of the year as the claims for the previous year’s over dues on EPF backed loans are paid during this period by the EPF division of CBSL. As of Jun-20, 64.96% of the NPA portfolio was EPF loans and it reported a gross NPA ratio of 73.89% as compared to 73.56% in Dec-19 and 70.96% in Dec-18. However, the recovery from the EPF loans from the EPF division of CBSL remained high at 98% in FY2019. The Non-EPF NPA portfolio accounted for 35.04% of the total NPA portfolio and it reported a gross NPA of 9.23% in Jun-20 as compared to 7.73% in Dec-19 and 7.31% in Dec-18. The effects of the Covid-19 pandemic was main reason for increase in NPA of the non-EPF portfolio. The Bank granted  moratorium to 65% of its portfolio as in Jun-20. Going forward, the Bank’s ability to maintain these facilities as regular facilities would be a key monitorable.

Moderate liquidity and concentrated funding profiles; SMIB’s asset and liability maturity (ALM) profile is characterized by significant negative cumulative mismatches in the less than 1-year bucket (36.21% of total assets as of Jun-20), as the majority of its borrowings are short-term compared to the long-term nature of its lending portfolio. ICRA Lanka notes the healthy deposit renewal rates of about 80-90% and availability of LKR 2.8 Bn contingent funding lines. SMIB’s liquid asset ratio stood at about 36.11% as of Jun-20 comfortably above the threshold of 20%. While the liquidity coverage ratio (LCR) was at 108% as of Jun-20, above the regulatory threshold of 90%. The Bank’s total funding stood at LKR 43.9 Bn and 97% of it was deposits (89% FDs, 5% savings and 3% special scheme deposits) as of Jun-20, while borrowings from banks and refinance loans accounted for the rest. SMIB’s savings deposits as a proportion of total deposits stood low at about 4.81% as of Jun-20 against LSBs average of about 22.91%, largely because of the limited franchise of the Bank.

Moderate profitability indicators; SMIB’s RoA and RoE remained moderate during H1CY2020 at 0.75% and 6.43%, respectively as compared to the LSBs sector average of 0.63% and 11.22%, respectively. The Bank’s net interest margins (NIMs) moderated to about 3.77% in H1CY2020 as compared to 4.52% in CY2019 and 4.60% in CY2018. The moderation was due to concessionary interest rates offered to the customers during Mar-20 to Jun-20 under the moratorium. The credit cost increased due to the effects of the Covid-19 pandemic to 0.40% in H1CY2020 as compared to 0.29% in CY2019 and 0.44% in CY2018. Operating expenses (as a proportion of total assets) moderated to 2.46% in H1CY2020 as compared to 3.43% in CY2019 and 3.39%in CY2018. Cost to income ratio moderated to about 63% as compared to 71% in CY2019 and 68% in CY2018. This was due to limited operations carried out during the 3 months long lockdown period. Going forward, it is crucial for SMIB to further improve its operating efficiencies and keep credit costs under control.

Analytical approach: For arriving at the rating, ICRA Lanka has applied its rating methodologies as indicated below. Links to applicable criteria:  ICRA Lanka’s Credit Rating Methodology for Banks

About the Bank:

The State Mortgage & Investment Bank is a 100% GoSL owned, Licensed Specialized Bank operating with 25 branches. SMIB is one of the five entities in Sri Lanka to offer EPF backed loans. Apart from the above, the Bank also offers mortgage backed housing loans, personal loans and leasing facilities to its customers. It commenced operations as the Ceylon State Mortgage Bank (CSMB) in December 1931. SMIB was formed by the State Mortgage & Investment Bank Act No. 13 of 1975, amalgamating CSMB and the Agricultural and Industrial Credit Corporation and commenced its operations from January 1979. In April 1998, the Bank was granted the license to operate as a licensed specialized bank by the CBSL.

In CY2019, SMIB reported profit after tax (PAT) of LKR 419 Mn (LKR 245 Mn in CY2018) on a total asset base of LKR 47.3 Bn as of Dec-19 (LKR 42.6 Bn as of Dec-18). For the six months ended Jun-20, the Bank reported a PAT of LKR 185 Mn (un-audited) on a total asset base of LKR 51.3 Bn.

Key financial indicators (audited)

CY2018CY2019H1CY2019 (Unaudited)H1CY2020 (Unaudited)
Net Interest Income1,9472,0301,034931
Profit after Tax245419138185
Net worth5,1875,6595,3265,854
Loans and Advances34,22535,89334,44435,616
Total Assets42,59947,31145,61851,340
Return on Equity4.83%7.73%5.27%6.43%
Return on Assets0.58%0.93%0.63%0.75%
Gross NPA21.75%21.21%22.06%21.73%
Net NPA20.30%19.31%20.28%19.30%
Capital Adequacy Ratio22.23%21.77%21.76%19.30%
Gearing (adjusted)7.07.17.37.5
Rating history for last three years:
Dasith Fernando
Senior Analyst
+94-11-4339907
dasith@icralanka.com

Niraj Jalan
Assistant Vice President – ICRA India
+91-33-71501146
Niraj.jalan@icraindia.lk

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