National Savings Bank; Ratings reaffirmed [SL]AAA with Stable outlook assigned for the proposed LKR 15,000 Mn Senior debt
|Instrument||Rated Amount (LKR Mn)||Rating Action|
|Issuer Rating||N/A||[SL] AAA (Stable); Reaffirmed|
|Senior, Unlisted, Rated Redeemable debenture programme||15,000||[SL] AAA (Stable); Assigned|
|Senior Unsecured Redeemable Debenture Programme||20,000||[SL] AAA (Stable); Reaffirmed|
|Subordinated Unsecured Redeemable Debenture Programme||6,000||[SL] AA+ (Stable); Reaffirmed|
|Basel III Compliant Additional Tier 1 Capital Bond Programme||5,000||[SL] AA (hyb) (Stable); Reaffirmed|
ICRA Lanka Limited has reaffirmed the issuer rating of [SL]AAA (pronounced SL triple A) with Stable outlook for National Savings Bank (NSB or the Bank). ICRA Lanka has also assigned [SL] AAA (pronounced as SL triple A) with Stable outlook for the proposed LKR 10,000 Mn (with an option to increase up to LKR 15,000 Mn) senior, unlisted, rated, redeemable debenture programme of the Bank.
ICRA Lanka has also reaffirmed the issue rating of [SL]AAA (pronounced SL triple A) with Stable outlook for the LKR 20,000 Mn senior, unlisted, unsecured, redeemable debenture programme, the issue rating of [SL]AA+ (pronounced SL double A plus) with Stable outlook for the LKR 6,000 Mn subordinated, unsecured, redeemable debenture programme of NSB and the issue rating of [SL] AA (hyb) (pronounced SL double A hybrid) with Stable outlook for the LKR 5,000 Mn Basel III compliant Additional Tier 1 (AT1) capital bond programme.
The ratings take note of the 100% Government of Sri Lanka (GoSL) ownership, which provides a strong likelihood of sovereign support and, the 100% explicit guarantee provided by the GoSL for the money deposited with the Bank and the interest thereof through the National Savings Bank Act (NSB Act). The ratings factor in the low-risk investment portfolio, good quality lending portfolio, granular deposit base and the adequate capital profile. The Bank’s investment portfolio is characterized by a low risk profile, with the NSB mandated to invest a minimum of 60% of the total deposits in government securities; as in March 2021, 66.71% of the deposits were invested in government securities. The quality of the lending portfolio is driven by zero NPAs reported on its exposure to GoSL, State-owned Entities (“SOE”) and corporate segments, which accounted for 22% of the net lending portfolio as in Mar-21. The standalone gross NPA ratio (GNPA %) of the retail portfolio (78% of the net lending portfolio) stood at 3.22% as of Mar-21. The Bank maintained healthy Capital adequacy ratios (CAR) with BASEL III complied Tier 1 capital ratio including capital conservation buffer (CCB) of 13.22% against a regulatory requirement of 8.00% as on Mar-21. The total capital ratio of 15.88% against a regulatory requirement of 12.00% as on Mar-21 was also reported.
ICRA Lanka believes that NSB will continue to benefit from timely Government support, considering its position as the largest licensed specialised bank in Sri Lanka. And also, the Bank provides vital funding support to GoSL as per the NSB Act. The outlook may be revised to ‘Negative’ in case of a steady shortfall in NSB’s capital buffers over the regulatory requirements as compared to ICRA Lanka’s expectations or significant weakening in the profitability and asset quality indicators.
Key rating drivers:
100% government ownership and explicit guarantee on deposits: NSB is a 100% government-owned specialised bank incorporated under the NSB Act in 1972. The main objective of the Bank is to promote savings habit in the country. GoSL provides explicit 100% guarantee through the NSB Act for the depositors’ deposit money and the interest thereon. Since the Bank’s inception, NSB has been able to self-fund its capital requirements and has not required any capital support from GoSL. ICRA Lanka expects GoSL’s support, if needed, given the Bank’s position of being the largest licensed specialised bank in the country and also being one of the important financiers of the GoSL. The Government has appointed a -Board comprising of a mix of qualified and experienced professionals, including a representative from the treasury and the Post Master General. The senior management of the Bank also consists of qualified and experienced banking professionals.
Low-risk nature of its investment portfolio: The Bank is mandated to invest a minimum of 60% of the deposits in government securities. As of Mar-21, 66.71% of the total deposits were invested in government securities, as compared to 62.66% as of Dec-20 (60.88% as of Dec-19). The above ratio has improved after the conversion of LKR 26 Bn loan pertaining to the Kothalawala Defence University (KDU) in CY2020 and LKR 59 Bn loan pertaining to Road Development Authority (RDA) in Q1CY2021. These loans were converted to debentures, following which they were recognized as investments in government securities. As of Mar-21, 85% of the investment portfolio consisted of Treasury Bills and Bonds followed by 11% in debentures and trust certifications, 2% in placement with banks, 1% in Sri Lanka Development Bonds, and the balance as investment in subsidiaries and equity securities. As of Dec-20, 97% of the government security portfolio was classified as Held to Maturity (“Financial Assets Measured at Amortised Cost”) and balance as Trading – Fair value through Profit and Loss (1%) and Fair Value through Other Comprehensive Income (2%). ICRA Lanka also takes comfort from the Banks’ modest exposure to dollar denominated government bonds.
Good quality lending portfolio with a reasonable growth level; NSB reported LKR 495 Bn net lending portfolio as of Mar-21 as compared to LKR 517 Bn as of Dec-20 (LKR 454 Bn as of Dec-19). The portfolio reported a Y-o-Y growth of 6.51% in Mar-21 from Mar-20 and a YoY growth of 13.73% in Dec-20 from Dec-19. The moderation of the portfolio in Q1CY2021 was a result of the steep reduction in the Bank’s corporate portfolio. ICRA Lanka notes that, over the past 12-15 months, the retail segment recorded significant growth amidst the growth in the personal loans. This is attributable to the low interest rates which prevailed from mid CY2020. During CY2020, the retail segment grew by 23.39%. The marginal degrowth (-0.19%) of Government and SOE portfolio in CY2020 was attributable to the net impact of SOE loan conversions. The moderation in the corporate segment is largely attributable to low credit demand from the banks as the banks were highly liquid during this period. Overall, the retail segment contributed to 78% of the net lending portfolio as on Mar-21, while the government & SOE segment contributed to 22% of the net lending portfolio. The corporate segment contributed to less than 1% of the net lending portfolio as on Mar-21. Based on NSB’s Act, all the SOE loans are secured by government guarantees and are routed through the Treasury, thus further strengthening the credit profile of the lending portfolio.
Asset quality indicators; although slightly moderated, continue to remain healthy supported by zero NPAs on GoSL & SOE and corporate portfolios; The Bank continued to report zero non-performing loans in the GoSL, SOE & corporate segments. The retail segments Gross NPA ratio increased in Dec-20 to 3.95% from 2.44% in Dec-19. The same improved somewhat to 3.22% as in Mar-21 amidst the improvement in recoveries and the growth in the portfolio. Slippages in the retail segment is largely attributable to the pandemic affecting the repayment capacity of the retail borrowers. The Bank’s overall GNPA ratio increased to 3.31% in Sep-20 from 1.60% in Mar-20. However, the Bank managed to bring it down to 2.79% in Dec-20 and further improve to 2.56% in Mar-21. ICRA Lanka also notes that, conversion of SOE loans (about LKR 26 Bn in CY2020 and LKR 59 Bn in Q1CY2021) to debentures also affected the GNPA ratio of the bank, due to the denominator effect. Amidst the current surge in the pandemic, ICRA Lanka expects the retail segment asset quality indicators to remain somewhat under pressure in the short term.
Granular deposit base backed by 100% GoSL guarantee; NSB reported a deposit base of LKR 1,302 Bn as of Mar-21 as compared to LKR 1,237 Bn reported as of Dec-20 (LKR 1,017 Bn as of Dec-19). The NSB Act provides explicit government guarantee for the deposits and interest payable thereon. The Bank has a granular deposit base with 37% of the deposits having a ticket size less than LKR 1.0 Mn as on Mar-21. The Bank reported a short term (less than 1 year) negative cumulative ALM mismatch of 71.18% as on Mar-21 due to its business model of shorter tenured deposits as against longer-tenured loan portfolio. The Bank’s Liquidity Coverage Ratio (All Currency) stood at 283.33% as of Mar-21 as compared to the regulatory requirement of 90%. ICRA Lanka takes comfort over the Bank’s investments in government securities which provides comfort over the Bank’s liquidity position.
Adequate capital profile; NSB reported a Tier-I Capital Ratio including CCB of 13.22% and a total capital ratio of 15.88% as of Mar-21 as compared to the regulatory requirement of 8.00% and 12.00% respectively. The Bank’s core capital stood at LKR 58 Bn as on Mar-21, well above the regulatory requirement of LKR 7.5 Bn threshold to be achieved by December 31, 2022. The Bank getting declassified as a systematically important bank in 2019 reduced the regulatory capital requirement by 150 basis points and a further 50 basis points was reduced amidst the pandemic by CBSL. NSB raised LKR 5 Bn via an Additional Tier 1 (AT1) bond in November 2020 which was rated by ICRA Lanka at SL AA (hyb) (Stable). ICRA Lanka has also assigned [SL]AAA with a Stable outlook for the Bank’s proposed LKR 10 Bn (with an option to increase to LKR 15 Bn) senior debenture. ICRA Lanka believes that as the largest licensed savings bank in the country, the GoSL will provide the required funding support to the Bank if required. Continuous maintenance of adequate buffers over and above the minimum capitalization requirements (Tier-I plus CCB and total CAR) would be critical from a rating perspective.
Significant improvement in profitability: The Bank’s Net Interest Margin (“NIM”) improved to 3.87% in Q1CY2021 vis-à-vis 2.61% in Q1CY2020. This is due to the decline in the AWPLR from mid CY2020 that resulted in a moderation in the cost of funds. The credit cost of the bank (Provision/ATA) for Q1CY2021 was a reversal of -0.13% due to the improvement of the non-performing portfolio in Mar-21 as compared to Q4CY2020. However, the credit cost is expected to increase during Q2CY2021, due to potentially higher delinquency levels. NSB reported a Profit After Tax (PAT) of LKR 10 Bn for CY2020, the highest PAT earned by the Bank. For Q1CY2021, the Bank reported a PAT of LKR 6.7 Bn. The Bank’s ROA (On PAT) for Q1CY2021 was 1.91% as compared to 0.60% in Q1CY2020 (0.80% in CY2020). Industry average of ROA (On PAT) for Specialized banks was 1.28% in Q1CY2021 vis-à-vis 0.18% in Q1CY2020
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:
National Savings Bank (NSB) was established in 1972 through the Parliament Act, No.30 of 1971 by amalgamating the Ceylon Savings Bank, the Ceylon Post Office Savings Bank, the savings certificate section of the Post Master General’s Department and the Ceylon War Savings movement. Currently, NSB operates with a 260-branch network as at March 31, 2020. The Bank’s subsidiaries, NSB Fund Management Co. Ltd is the dedicated primary dealer and Sri Lanka Savings Bank is a licensed specialized bank. During the CY2020, NSB reported a PAT of LKR 10,108 Mn on a total asset base of LKR 1,364 Bn as compared to a PAT of LKR 6,381 Mn on a total asset base of LKR 1,158 Bn in the previous. For Q1CY2021, NSB reported a PAT of LKR 6,715 Mn on a total asset base of LKR 1,443 Bn.
Key financial indicators
|Net Interest Income||28,832||34,890||7,658||13,405|
|Profit after Tax||6,381||10,108||1,782||6,715|
|Networth (Adjusted for revaluation reserve)||40,314||45,219||36,171||51,292|
|Loans and Advances (Net)||454,395||516,795||465,051||495,324|
|Investment portfolio (Net)||635,384||785,538||658,490||878,627|
|Return on Equity||14.34%||20.67%||15.68%||49.41%|
|Return on Assets (On PAT)||0.58%||0.80%||0.60%||1.91%|
|Gross Non-Performing Ratio||1.57%||2.79%||1.60%||2.56%|
|Net Non-Performing Ratio||1.17%||2.12%||1.14%||1.82%|
|Total Capital Adequacy Ratio (BASEL III)||15.82%||16.45%||13.60%||15.88%|
|Gearing (Adjusted for revaluation reserve)||27.27||28.53||31.48||26.51|
Rating history for the last three years:
|Sachini Costa |
Subsidiary of ICRA Limited
A Group Company of Moody's Investors Service
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