Sanasa Development Bank

ICRA Lanka upgrades the Issuer Rating of Sanasa Development Bank PLC

InstrumentRated Amount (LKR Mn)Rating Action
Issuer RatingN/AUpgraded to [SL]BBB (Stable) from [SL]BBB- (Stable)

Rating action

ICRA Lanka Limited has upgraded the Issuer Rating of Sanasa Development Bank PLC (“SDB”/”the Bank”) to [SL]BBB (Pronounced as S L triple B) from [SL]BBB- (pronounced as S L triple B minus). The outlook remains stable.

Rationale

The revision of SDB’s rating factors the improvement of its capital profile with the completion of the Secondary Public Offer (SPO) amounting to LKR 3.6 Bn (4% of risk weighted assets – RWAs) in August 2021. ICRA Lanka takes comfort from the favourable uptake at the SPO by international funding organisations and a subsidiary of an established conglomerate in Sri Lanka. ICRA Lanka envisages the continued support from these partners to support the Bank’s higher than industry growth rates. The rating revision also factored in the healthy asset quality indicators (Gross Non-Performing Asset; GNPA %) of the bank, which was maintained similar to most Licenced Commercial Banks (LCBs) in the country despite SDB serving the low-tier segment of the economy similar to most Licensed Specialised Banks (LSBs). As on September 30, 2021, SDB reported a GNPA % of 4.78% against LSB and LCB industry average of 7.83% and 4.53%, respectively.  However, ICRA Lanka takes cognisance of the Bank’s shift of focus towards the SME segment which typically witness relatively higher GNPA %; and marginal increase in slippages from Q4CY2020. Also, the bank’s GNPA % has been somewhat controlled by the high growth of the its loan book.

Going forward, the Bank’s ability to maintain healthy asset quality indicators amidst the challenges in the economy and the ability to maintain its healthy capital profile will remain key rating sensitivities.

Outlook: Stable

The stable outlook reflects the SDB’s improved capital profile and healthy asset quality indicators. The outlook may be revised to “Positive”in the event the Bank manages to improve its asset quality indicators amidst the growing focus towards SME segment, while also maintaining its healthy capital buffers. The outlook may be revised to “Negative” in the event of a significant deterioration of the asset quality or weakening capital buffers and profitability.

Key rating drivers

Credit strengths

Established franchise with strong promoter and shareholder profile: SDB has a strong & established franchise on the back of the SANASA movement, which provides a competitive edge for the bank in the rural and semi urban regions for sourcing, lending and deposit businesses. As on September 30, 2021, SDB operated with a branch network of 94 branches and 1,440 employees. SDB also receives continued financial support from its international funding organisations such as subscribing to the capital infusions during the rights issue in CY2020 and SPO in August 2021.  The international funding organisations has also provided assistance in terms of strengthening the systems and procedures in order to drive the business growth using new technology.

The shareholder profile of the Bank was further enhanced from the SPO which concluded in August 2021; wherein ICONIC Property Twenty-Three Pvt Ltd; a subsidiary of LOLC Holdings PLC (rated [SL]A/Stable by ICRA Lanka) acquired 15.0%, while Belgian Investment Company for developing countries acquired a stake of 10.0% and Nederlandse Financierings-Maatschappij Voor Ontwikkelingslanden N.V. increased its stake to 10.96%. In addition to above, as on September 30, 2021, CB NY S/A International Finance Corporation(IFC) and SBI Emerging Asia Financial Sector Fund PTE. LTD (SBI) held stakes of 3.4% and 1.8% respectively. The international funding organisations in total holds more than 25% stake of the Bank.  

Healthy capitalization profile; further improved by the SPO: SDB maintained a healthy capital profile with a networth of LKR 9.9 Bn as at the end of CY2020. ICRA Lanka noticed that the Bank’s high portfolio growth put pressure on its capital profile. SDB successfully completed a secondary public offer (SPO) in August 2021 raising LKR 3.6 Bn. Post the SPO, SDB’s networth increased to LKR 14.0 Bn as on September 30, 2021. As a result, the tier 1 capital ratio improved to 12.41% post the SPO in September 30, 2021 as against 9.32% as of June 30, 2021 (regulatory requirement of 8.00%). The total capital ratio stood at 15.15% as on September 30, 2021 (regulatory requirement of 12.00%). ICRA Lanka takes comfort from the confidence placed by the international funding agencies and large conglomerates in Sri Lanka during the capital raising programmes and envisages continued support in order to support the Bank’s growth plans. 

SDB continues to maintain healthy asset quality indicators: Over the past, SDB maintained healthy asset quality indicators with similar gross non-performing ratios (GNPA %) to that of large commercial banks in the country. Despite serving the lower-tier segment of the economy, the Bank’s low exposure to micro lending and sizable exposure towards the loans to pensioners and salaried employees (~37%) have helped to maintain healthy asset quality indicators. The multilateral investors have also supported in better management practices and systems resulting in healthy asset quality indicators.

SDB reported a GNPA % of 4.78% compared to the LCB and LSB sector average of 4.53% and 7.83%, respectively as of September 30, 2021. However, ICRA Lanka notes the Bank’s high growth in the net loans and advances where it reported a CAGR of 13% over the past 3 years as against about 9% in the LSB sector has also contributed to the lower GNPA ratio. ICRA Lanka factors in the Bank’s reasonable provision coverage of around 46% against about 30% of the LSB sector. The Bank’s sizable exposure towards salary/pension backed loans (37% of total loans as on June 30, 2021) reported zero-non performing loans. However, ICRA Lanka takes cognisance of the Bank’s growing focus on the SME segment and will continue to monitor the asset quality of the Bank, as SME lending typically has had high gross NPA % of 6.17% compared to 3.66% of the retail segment and 5.42% of the co-operative segment as on June 30, 2021. 

Healthy profitability metrics: SDB has improved its profitability over the past few years to record a Return on Assets (On PAT) of 0.72% for the 9MCY2021 (PAT of LKR 750 Mn) compared to 0.78% (PAT of LKR 675 Mn) in 9MCY2020. The rapid portfolio growth resulted in a slight moderation of the ratio. The core margins of the Bank too remained healthy; although it has slightly moderated amidst the low systemic interest rates. SDB reported a Net Interest Margin (NIM %) of 4.68% for 9MCY2021 (4.97% for 9MCY2020). The credit cost (provisioning/ATA) somewhat increased to 0.44% in 9MCY2021 (0.42% in 9MCY2020) due to prevailing macro challenges and the impact of the same on the borrowers. The improvement of the cost to income ratio to 71.88% in 9MCY2021(81.97% in CY2018) also contributed to the healthy profitability over the past few years. The profitability, however remains somewhat lower than that of the LSB sector where the LSB sector reported a RoA (On PAT) of 1.25% for 9MCY2021 (0.62% in 9MCY2020). The ability of the Bank to maintain healthy profitability indicators amidst the expansion of its SME segment will remain a key monitorable.

Credit Challenges:

Moderate but improved gearing levels & marginal reduction in the public deposit concentration: The historical trend of a high exposure on fixed deposits has somewhat reduced post the SPO. SDB has also increased its low-cost savings deposits. The concentration of the public deposits reduced to about 72% as on September 30, 2021 from 79% as on June 30, 2021 and December 31, 2020. The development of the digital platforms by the Bank has increased the circulation of money lying in the savings accounts of the rural community. The savings deposit to total deposits increased to 24.10% as on September 30, 2021 (LSB sector at 23.90%). The Bank’s funding profile is also strengthened by funding received from several international organisations & ICRA Lanka draws comfort from the continuous support extended by them.

The gearing levels of the Bank remained quite moderate but has improved following the SPO to 9.48 times as on September 30, 2021 as compared to 11.94 times as on June 30, 2021. This is in comparison to 14.44 times as on September 30, 2021 of the LSB sector. ICRA Lanka envisages that the healthy internal generations is likely to support the Bank to maintain healthy gearing levels.

Moderate liquidity profile; improved following the proceeds of the SPO: Over the past, SDB’s liquidity profile remained somewhat moderate and reported negative cumulative ALMs. The negative cumulative asset-liability mismatch was mainly due to the longer tenure nature of the lending profile against the short-term deposits and borrowings. As on June 30, 2021, SDB reported a negative cumulative ALM mismatch for less than 1 year of -18.82% as compared to -21.02% as on December 31, 2020. The ALM mismatch remained negative but marginally improved to -14.02% as on September 30, 2021 following the completion of the SPO. ICRA Lanka also draws comfort from the improved liquidity ratios in September 30, 2021 given the unutilized proceeds from the SPO. The liquidity coverage ratio has significantly increased to 182.86% as on September 30, 2021 (regulatory requirement of 100%) from 125.21% as on December 31, 2020 (regulatory requirement of 90%). The liquid asset ratio stood at 22.76% as on September 30, 2021 against a regulatory requirement of 20%.

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:

SANASA Development Bank PLC (SDB) is a Licensed Specialised Bank established in the year 1997. SDB provides financial solutions to retail, SME, Business Banking and co-operative customers through its 94-branch network across the island. In 2012, SDB was listed on the Colombo Stock Exchange (CSE). As on September 2021, the SANASA affiliated entities which includes, cooperative societies, trusts and other institutions held a stake of 17.0%. The other top shareholders as on September 2021 include Iconic Property Twenty Three (Pvt) Ltd (15.0%), FMO (10.9%), Ayenka Holdings (Pvt) Ltd (10.9%) and BIO (10.0%). For 9MCY2021, SDB reported a profit after tax (PAT) of LKR 750 Mn on an asset base of LKR 148,930 Mn. For CY2020, SDB reported a PAT of LKR 836 Mn on an asset base of LKR 129,060 Mn compared to a PAT of LKR 253 Mn in CY2019 on an asset base of LKR 107,784 Mn.

Key financial indicators

LKR MnCY2019CY20209MCY2020*9MCY2021*
Net Interest Income5,6976,1274,3174,882
Profit after Tax/ (Loss)253836675750
Net worth7,6699,9168,15814,020
Loans and Advances (Net)85,823102,66298,655109,905
Total Assets107,784129,060123,636148,930
Return on Equity3.35%9.51%11.38%8.36%
Return on Assets (On PAT)0.25%0.71%0.78%0.72%
Gross NPA4.38%4.54%4.53%4.78%
Net NPA1.87%1.79%1.78%1.76%
Capital Adequacy Ratio (Tier 1)9.43%9.85%8.15%12.41%
Gearing (times)12.7711.7413.839.48

*Unaudited financials

Rating history for last three years
Analysts
Sachini Costa
+94-7774781595
sachini.costa@icralanka.com

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


Disclaimer
ICRA Logo

Subsidiary of ICRA Limited

CORPORATE OFFICE
Level10, East Tower, World Trade Center, Colombo 01, Sri Lanka
Tel:+94 11 4339907;Fax:+94112333307 Email:info@icralanka.com; Website:www.icralanka.com

© Copyright, 2022 ICRA Lanka Limited. All Rights Reserved. Contents may be used freely with due acknowledgement to ICRA Lanka.

ICRA Lanka ratings should not be treated as recommendations to buy, sell or hold the rated debt instruments. ICRA Lanka ratings are subject to a process of surveillance, which may lead to revision in ratings. An ICRA Lanka rating is a symbolic indicator of ICRA Lanka’s current opinion on the relative capability of the issuer concerned to timely service debts and obligations, with reference to the instrument rated. Please visit our website www.icralanka.com or contact ICRA Lanka’s office for the latest information on the outstanding ICRA Lanka ratings.

All information contained herein has been obtained by ICRA Lanka from sources believed by it to be accurate and reliable, including the rated issuer. ICRA Lanka however has not conducted any audit of the rated issuer or of the information provided by it. While reasonable care has been taken to ensure that the information herein is true, such information is provided ‘as is’ without any warranty of any kind, and ICRA Lanka in particular, makes no representation or warranty, express or implied, as to the accuracy, timeliness or completeness of any such information.

ICRA Lanka does not take any responsibility for accuracy of material/documents prepared or published by other parties based on this document. All ICRA Lanka official rating rationales are prepared in English and external parties may present or publish translated versions of the same. Readers are henceforth advised to refer to the ICRA Lanka’s official rating rationale in the event of any inconsistency found in such documents.

ICRA Lanka or any of its group companies may have provided services other than rating to the issuer rated. All information contained herein must be construed solely as statements of opinion, and ICRA Lanka shall not be liable for any losses incurred by users from any use of this publication or its contents.