State Mortgage and Investment Bank

ICRA Lanka reaffirms the Issuer rating of State Mortgage & Investment Bank

InstrumentRated 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 as S L triple B plus) with Stable outlook for State Mortgage & Investment Bank (‘‘SMIB”/ ‘‘the Bank”).

Rationale

The rating factors in the 100% ownership by the Government of Sri Lanka (GoSL) and the comfortable capital adequacy ratios (CAR) of the Bank where it reported a Tier 1 capital ratio of 21.77% as on September 2021 (Regulatory requirement of 8.00%) and a total capital ratio of 22.87% (Regulatory requirement of 12.00%). The Bank’s minimum core capital remained below the LKR 7.5 Bn regulatory minimum which is to be complied by the end of CY2022. ICRA Lanka envisages a sizeable capital infusion of about LKR 1.7 Bn in order to fulfil this requirement. ICRA Lanka also takes cognisance of the Bank’s shift in focus from the highly secured EPF (Employee Provident Fund) loans to riskier business and working capital loans, mortgage loans and personal loans. The Gross Non-Performing asset ratio (GNPA %) for the non-EPF (Non-Employee Provident Fund) portfolio stood at 11.22% as on September 2021; somewhat improved from 12.15% as on June 2021 (10.71% as on December 2020). This further improved to 10.13% as on November 2021. ICRA Lanka would continue to closely monitor the improvement of SMIB’s capital structure to meet the upcoming new capital requirement, its asset quality movements and its overall financial performance going forward.

Outlook: Stable

The stable outlook reflects the 100% GoSL ownership and the currently adequate capital levels of the Bank. The outlook may be revised to “Negative” in case of further weakening of the asset quality indicators and delays in meeting the upcoming minimum capital requirements. The outlook may be revised to “Positive” in case of a steady improvement in its asset quality indicators, profitability indicators, and the capitalisation profile.

Key rating drivers

Credit strengths

100% government ownership; SMIB is a 100% GoSL owned licensed specialised bank in the country with a good track record of financial and managerial support from GoSL in the past. The Board is represented by 3 government administrative officers representing ministries of finance, agriculture, housing and construction. GoSL infused LKR 250 Mn in 2016 by converting a loan granted to the Bank into equity. At present, the Bank is under-capitalised to meet the next regulatory minimum requirement of LKR 7.5 Bn which is to be met by end of CY2022. ICRA Lanka envisages a capital infusion of around LKR 1.7 Bn in order to meet the same.

Healthy capital adequacy ratios; however, sizeable capital required to meet the minimum core capital requirement by CY2022; In terms of the capital adequacy ratios (CAR), SMIB remains in a comfortable position given the high exposure to EPF loans and mortgage loans but expects this to somewhat moderate given the Bank’s shift of focus away from the zero-risk EPF loans. As on September 2021, the Tier 1 capital ratio stood at 21.77% (Regulatory requirement of 8.00%) and the total capital ratio stood at 22.87% (Regulatory requirement of 12.00%). SMIB’s core capital stood at LKR 5.8 Bn as on September 2021 and was above the current regulatory requirement of LKR 5.0 Bn. However, the regulatory requirement will be further increased to LKR 7.5 Bn by the end of CY2022 and SMIB has a sizable deficit to meet this requirement. After accounting for the expected internal generations, SMIB will further require about LKR 1.7 Bn to meet this requirement.

Credit Challenges:

Bank’s shift in the focus away from highly-secured EPF loans increases the overall risk profile of the portfolio: The Bank’s gross non-performing ratio (GNPA %) has been on the higher side in the past, due to the high NPAs recorded in the EPF portfolio but the ability to recover the defaulted amount against the borrower’s EPF balance provided comfort. The overall GNPA % has been above 23% in the past. However, the curtailing of the EPF portfolio and improvements in the collections of the EPF portfolio has led to the improvement of the overall GNPA % in the recent past (~70% of the Bank’s NPA is coming from the EPF portfolio). The overall GNPA % improved to 22.10% as on September 2021 (22.94% in December 2020 and 21.21% in December 2019). However, ICRA Lanka notes the rise on the GNPA % of the portfolio excluding the EPF loans, with the ratio increasing to 12.15% as on June 2021 (10.71% as on December 2020 and 7.73% as on December 2019). ICRA Lanka notes that this is largely attributable to the lockdown restrictions in the country during mid CY2021 where the collections were affected. The GNPA % excluding the EPF portfolio has improved to 11.22% in September 2021 with the same improving further to 10.13% as on November 2021. The overall provision coverage remained below industry level as seen across in the past due to the zero-provisioning for EPF loans. As a result, the solvency ratios remained above 100% given the low provisioning.  However, ICRA Lanka notes a satisfactory provisioning coverage for the portfolio excluding the EPF loans which stood above the LSB sector. ICRA Lanka will continue to closely monitor the asset quality indicators and its impact on earnings given the shift from highly-secured EPF loans to risky personal loans, working capital loans and business loans. Going forward, the Bank’s ability to maintain these facilities as regular facilities would be a key monitorable.

Moderate earnings profile; The low systemic interest rates have resulted in a reduction in the core margins of the Bank, where the Net Interest Margin (“NIM”) moderated to 3.88% in 9MCY2021 (4.22% in 9MCY2020). Fee income/ATA remained at 0.25% in 9MCY2021 as against 0.21% in 9MCY2020. ICRA Lanka notes an improvement in the credit cost where provisioning/ATA improved to 0.22% for 9MCY2021 as compared to 0.55% for 9MCY2020. ICRA Lanka expects some increase in the Bank’s credit costs in the short to medium term amidst the challenging macro environment affecting the vulnerable segments of the economy, to which SMIB is largely exposed. SMIB’s profitability indicators remained below the sector average with SMIB reporting a Return on Assets (On PAT) of 0.68% for 9MCY2021 as compared to the licensed specialised banking sector average of 1.25%. For 9MCY2020, SMIB reported a ROA (On PAT) of 0.85%. (LSB Sector average 0.62%).

Liquidity and funding profile remains stretched with increased negative ALM and high concentration on public deposits; SMIB’s asset and liability (ALM) profile is characterised by significant negative cumulative mismatches in the less than 1 year bucket due to the Bank’s short-term tenured borrowing profile against the longer-tenured lending profile. The negative ALM further increased to -40.02% as on June 2021 from -36.21% as on June 2020. The statutory liquid asset ratio stood at 33.47% as on September 2021 comfortably above the regulatory requirement of 20.00%. The liquidity coverage ratio too remained comfortable at 111% as on September 2021 against the regulatory requirement of 90%. In terms of the Bank’s funding structure, it remains almost entirely funded by public deposits as seen across the past. ICRA Lanka takes cognisance of the Bank’s high reliance on public deposits as well as the lower than sector average savings deposit to total deposit ratio. As on September 2021, this ratio stood at 5% (LSB Sector 24%) and remains low due to the Bank’s limited franchise (25 branches as on September 2021). The gearing levels remained moderate with 7.16 times reported as on September 2021 (LSB Sector 14.44 times as on Sep- 2021).

Moderate scale of operations; SMIB is a moderate sized LSB with a total asset base of LKR 52.9 Bn and branch network of 25 as of September 2021. The Bank mainly offers personal loans, mortgage loans and EPF backed loans which accounted for 49%, 26% and 17% respectively of its LKR 38.1 Bn gross portfolio as of June-21. ICRA Lanka takes note of the increase in the share of personal loans which stood at 49% as of June-21 as opposed to just 17% about 5 years ago and the moderation of the EPF portfolio which accounted to 17% as on June 2021 against 36% 5 years ago. However, the granular nature of the portfolio which has led to lower levels of concentration (top 10 exposures accounted for 1.30% as on June 2021) provides comfort. ICRA Lanka notes some increase in the concentration levels over the past few years with the Bank diversifying into newer products with larger ticket sizes such as business loans. The ability of the Bank to maintain the quality of the portfolio while diversifying to new products would be a key monitorable.

Analytical approach: For arriving at the ratings, ICRA 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 offers mortgage-backed housing loans, personal loans, EPF backed 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 CY2020, SMIB reported profit after tax (PAT) of LKR 356 Mn (LKR 419 Mn in CY2019) on a total asset base of LKR 52.8 Bn as of Dec-20 (LKR 46.9 Bn as of Dec-19). For the nine months ended Sep-21, the Bank reported a PAT of LKR 269 Mn (un-audited) on a total asset base of LKR 52.9 Bn.

Key financial indicators
CY2019CY20209MCY2020*9MCY2021*
Net Interest Income2,0302,1161,5981,539
Profit after Tax/ (Loss)419356322269
Net worth5,6596,0205,9826,289
Loans and Advances (Net)35,89336,85736,11237,764
Total Assets46,98052,80253,83252,994
Return on Equity7.73%6.09%7.38%5.83%
Return on Assets (On PAT)0.93%0.71%0.85%0.68%
Gross NPA21.21%22.94%22.58%22.10%
Net NPA19.31%20.24%20.07%18.83%
Capital Adequacy Ratio (Tier 1)21.04%21.58%20.02%21.77%
Gearing (times) (Adjusted for revaluation)7.167.617.667.16

*Unaudited financials

Rating history for last three years:
Analysts
Sachini Costa
+94-774781595
sachini.costa@icralanka.com  

Niraj Jalan
+91-33-71501146
niraj.jalan@icraindia.com

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