Concurrently, the outlook on the long-term rating has been revised from stable to positive.
The revision reflects the Bank’s demonstrated ability to maintain its asset quality indicators over the past few years despite catering to a relatively risky target market and improved capitalisation levels supported by consistent capital infusions.
The ratings are supported by SDB’s above average asset quality, good performance and capitalisation along with its strong rural presence, particularly in micro-financing. However, the ratings are moderated by the Bank’s small stature, its relatively risky target clientele and below average liquidity position.
SDB is a relatively small licensed specialised bank, accounting for 3.16% of the LSB industry as at end-December 2011; it operates as the apex financial institution of the Sanasa movement, one of the largest co-operative networks in the country, and focuses on providing micro-financing solutions to the rural population, thereby promoting regional economic development. The Bank mainly disburses loans to Sanasa members through grassroots-level primary societies, to non-members through the Bank’s own group lending scheme under which loans are mutually guaranteed by group members, as well as to SMEs. SDB’s proximity to its clients through the cooperative network coupled with the social pressure and stigma associated with loan defaults in rural communities has contributed towards good collections and enabled the Bank to maintain above average asset quality.
SDB’s asset quality is opined to be above average attributed to its good collections on the back of its group lending system and proximity to its clients through the co-operative network which has enabled the Bank to maintain a better gross non-performing loans ratio than its LSB peers.
Furthermore, it has demonstrated an ability to maintain credit quality notwithstanding its somewhat risky customer segment.
Despite an aggressive 31.99% year-on-year loan growth in FYE December 2011 which was in line with industry growth, SDB’s gross NPLs inched up only a marginal 1.94% to Rs. 739.39 million, while its gross NPL ratio improved to 4.42% as at end-FY Dec 2011 (FY Dec 2010: 5.72%), and further to 4.38% as at 1Q FY Dec 2012.
“We opine SDB’s performance to be good owing to its net interest margin of 8.99% in FY Dec 2011 (FY Dec 2010: 10.50%), which was better than that of other licensed commercial and specialised banks; the Bank’s focus on a relatively risky customer segment has enabled it to charge higher interest rates on its loans. Although SDB’s NIM dipped to 7.99% in 1Q FY Dec 2012 in a rising interest rate environment, it continued to be above the industry average,” RAM Ratings Lanka said.
The Bank’s cost-to-income ratio worsened to 69.92% in FY Dec 2011 (FY Dec 2010: 60.60%) on the back of increased administrative expenses relating to branch expansion and staff salary revisions. The ratio further worsened to 80.19% as at 1Q FY Dec 2012 on the back of mark-to-market losses on SDB’s equity investment portfolio. As such overall pre-tax profits declined 16.83% y-o-y to Rs. 537.77 million in FY Dec 2011.
Further, the Bank’s funding composition remained relatively unchanged with deposits dominating the funding base at 76.85% in FY Dec 2011 (FY Dec 2010: 78.22%). Although, SDB’s deposit base expanded 20.75% y-o-y, its loans to deposit ratio weakened to 108.12% during the same period (FY Dec 2010: 98.40%) on the back of robust loan growth and capital infusions. With regards to liquidity, the Bank’s statutory liquid asset ratio clocked in just above the regulatory minimum at 20.51% as at FY Dec 2011 (FY Dec 2010: 25.60%) and weakened further to 20.09% as at 1Q FY Dec 2012 on the back of loan growth; the ratio compared weaker than that of peers. However, we derive comfort from the availability of LKR 1.00 billion of contingency funding lines.
Elsewhere, SDB maintained good capitalisation levels despite robust loan growth, supported by continuous equity injections since 2004. As such it reported tier-1 and overall risk weighted capital adequacy ratios of 17.37% and 17.77% respectively as at FY Dec 2011, which dipped slightly to 15.96% and 16.31% respectively as at 1Q FY Dec 2012. The Bank is viewed to have a sufficient equity cushion to absorb any potential delinquencies.
SDB’s ratings may be upgraded if it continues to improve or maintain its asset quality indicators at current levels while its capitalisation level remains intact. Conversely, the outlook may be revised to stable if SDB’s asset quality indicators show deterioration or capitalisation level weakens.