Sri Lanka Savings Bank

Sri Lanka Savings Bank: Rating reaffirmed with Stable outlook

  InstrumentRated Amount (LKR Mn)Rating Action
  Issuer RatingN/A[SL]BBB-; with Stable outlook; reaffirmed

Rating action:

ICRA Lanka Limited has reaffirmed the Issuer Rating of [SL]BBB- (Pronounced as S L Triple B Minus) with Stable outlook for Sri Lanka Savings Bank.

Rationale:

Sri Lanka Savings Bank (herein referred as ‘SLSB’ or ‘the Bank’) is a fully owned subsidiary of state-owned National Savings Bank (NSB, rated AAA; Stable by ICRA Lanka). The Bank maintains comfortable risk-weighted Capital Adequacy Ratios (CAR) characterised by a Tier 1 and total CAR of 97% each as of Dec-21. However, SLSB would have to enhance its core capital to LKR 7.5 Bn by Dec-23 from LKR 5.3Bn as of Dec-21, in order to meet the minimum core capital requirement for Licensed Specialised Banks (LSB’s), stipulated by the Central Bank of Sri Lanka (CBSL). ICRA Lanka considers the timely completion of the proposed merger with NSB as a key monitorable, going forward.

SLSB is relatively a small scale licensed specialized bank, with a total assets base of LKR 8,705 Mn as of Dec-21 (LKR 9,266 Mn as of Dec-20) and total service outlets/branches network of 04 leading to limited franchise as of Dec-21. The rating is constrained by the weak asset quality indicators with a Gross Non-Performing Assets (GNPA) ratio of 47.48% which is largely attributable to the legacy lending portfolio of collapsed ‘Pramuka Savings and Development Bank’ (PSDB) and a Net NPA ratio of 2.97% as of Dec-21 after providing for PSDB legacy NPA portfolio. ICRA Lanka expects the asset quality to remain under pressure in the near term since the challenging macroeconomic conditions in the country adversely affect the core clientele served by the bank.

Outlook: Stable

ICRA Lanka is of the view SLSB will benefit, from the operational and financial support from the strong parentage of NSB. The outlook may be revised to ‘Positive’ in case of a significant improvement in the resource and earnings profile of the bank with the portfolio expansion, while keeping the asset quality under control. The outlook may be revised to ‘Negative’ in case of a sharp deterioration in asset quality and profitability indicators or lower than expected support from the parent entity.

Key rating drivers:

Credit strengths

Support from the parent entity to ensure resilience: With the acquisition in October 2019, the Bank now is a fully owned subsidiary of National Savings Bank (NSB), the largest licensed specialized bank in Sri Lanka, with a total asset base of LKR 1,579Bn as of Dec-21. ICRA Lanka expects SLSB to benefit from the strong parentage, in terms of both operational and financial support.

Healthy capital ratios even though highly dependent on the parent to meet the minimum absolute core capital requirement: SLSB maintains a comfortable capitalization profile with both core capital ratio and total capital ratio of 97% as of Dec-21 (regulatory requirement of 8% and 12% respectively) compared to 82% as of Dec-20. Further, SLSB reported a core capital of LKR 5.3Bn as of Dec-21 and requires a significant capital infusion by December 2023 to comply with the minimum core capital requirement of LKR 7.5Bn stipulated by the CBSL. However, the rating takes note of the ongoing plan to merge SLSB, with its parent entity, and the timely completion of the same will be a key monitorable, going forward.

Healthy liquidity profile commensurate with the debt servicing obligation:

A major portion of the assets of the Bank is in the form of interest earning liquid investments (73% as of Dec-21), as the bank has not expanded its lending profile significantly.  Liquidity Coverage Ratio (LCR) of 1,548% as of Dec-21 compared to the minimum regulatory requirement of 100% reflects the strong liquidity position of the Bank. ICRA Lanka notes the on-balance sheet liquidity of the bank commensurate with the liabilities, which include 765Mn in public deposits and LKR 409Mn in other borrowings as of Dec-21.

Credit challenges

Weak asset quality mainly attributable to legacy portfolio: Gross Non-Performing Assets (GNPA) ratio is significantly high (47.48% in Dec-21) compared to the sector average mainly due to the non-performing loan portfolio attributable to the legacy portfolio absorbed from the Pramuka Savings and Development Bank (PSDB). However, ICRA Lanka notes that active lending accounted for only about 16% of the total assets of the bank as of Dec-21 and PSDB legacy NPA portfolio which is under review and recovery is largely provided for. Net NPA is reported at 2.97% after all provisioning adjustments. While the management has curtailed incremental lending from January 2021 onwards, ICRA Lanka expects the asset quality of the bank to remain under pressure in the short term, as the challenging operating environment will adversely affect the core segments served by the bank.

Modest scale of operations and limited franchise impacts the profitability: SLSB is relatively a small sized specialized bank with a total asset base and a lending portfolio of LKR 8.7 Bn and LKR 1.4 Bn respectively as of Dec-21. The asset base is dominated by its investment profile accounting to 73% as of Dec-21 (67% in Dec-20). Bank has maintained a high proportion of investments historically in order to facilitate the repayment of the deposit holders of the failed Pramuka Savings and Development Bank (PSDB). SLSB has reported PAT of LKR 255Mn in Dec-21 and 275Mn in Dec-20 (negative Y-o-Y growth of 7.27%). Since 2017, the bank has refrained from taking any significant business decisions due to pending merger with NSB. The loan book of the bank is shrinking due to the halt on lending activities as instructed by the regulator with effect from January 2021 (gross loans in Dec-21 and Dec-20 are 1.4Bn and 2.1Bn respectively reporting negative Y-o-Y growth of 33%). Further, SLSB has only 04 branches including its head office leading to limited franchise to grow its portfolio.

However, ICRA Lanka expects that the interest income of the Bank will improve under the current rising interest rates scenario since the composition of the assets is dominated by interest-earning liquid investments.

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 Sri Lanka Savings Bank was established in July 2006 as a state owned licensed specialized bank, with the primary objective of acting as the administrative trustee of the assets and liabilities of Pramuka Savings and Development Bank (PSDB) which was failed due to mismanagement. In 2010, with state intervention, National Development Trust Fund (NDTF) was merged with SLSB to meet the capital deficiency of the Bank. Until 2011, SLSB was only authorised to recover the PSDB portfolio and pay-off the withdrawals of its deposit holders. Subsequently, in 2011, the articles of the Bank were amended to enable SLSB to commence its own lending operations. Following a government budget proposal in 2016, SLSB was acquired by NSB in October 2019. Currently, SLSB is in the process of merging with its parent NSB as proposed by the regulator (CBSL).

Key financial indicators
LKR MnCY2019CY2020CY2021
Net Interest Income924714547
Profit after Tax448                275                255
Net worth4,9316,5306,807
Loans and Advances2,2222,0691,357
Total Assets8,7179,2668,705
Return on Equity8.68%4.80%3.83%
Return on Assets (on PAT)5.01%3.06%2.84%
Gross NPA40.69%42.44%47.48%
Net NPA3.76%4.26%2.97%
Capital Adequacy Ratio83.78%82.00%97.00%
Gearing (times)0.4                 0.3                0.2
Rating history for the last three years:
Analysts
Sachini Costa
+94-774781595
sachini.costa@icralanka.com

Sahan Fernando
+94-774781343
sahan@icralanka.com

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

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