Financial Times

Fitch Ratings Lanka Ltd affirms ‘A (sri)’ rating of HDFC
Fitch Ratings Lanka Ltd (FRL) said last week it has affirmed the ‘A(sri)’ national rating for the implied Long-term unsecured Senior Debt of Housing Development Finance Corporation Bank of Sri Lanka (HDFC).

The ‘A(sri)’ long term rating denotes a low expectation of credit risk. The capacity for timely payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to changes in circumstances or in economic conditions than is the case for higher ratings, Fitch said in a statement.

The rating affirmation reflects the relatively low credit risk in HDFC’s core housing mortgage business and the improving financial profile. HDFC’s financial performance was relatively strong during 2004. Net interest margins dipped marginally to 7.1% whilst the cost/income ratio increased to 46.3% on account of a salary revision. The ROA remains healthy despite declining from to 2.7% in 2004 (3.6% in 2003) largely due to increased taxation and to a lesser extent, lower margins. Going forward ROA would be under pressure due to the lower margins on new loans being disbursed as well as higher taxation. Nevertheless it would remain healthy, it said.

Recovery efforts have been enhanced since 2003, with greater attention paid to the reduction of NPLs. Asset quality continued to improve during the year. Absolute NPLs reduced by 16% in 2004, despite the healthy loan growth over the last few years. The overall NPL/Gross loan ratio has been improving since 2001. The NPL ratio reduced to 7% at end June 2005 from 22% in 2001.

The improvement in asset quality was reflected in the solvency ratio, Net NPL/Equity which has improved to 41% at end June 2005. HDFC is comfortably capitalised with a Tier 1 capital ratio of 30.6% at Dec 2004. The capital position would further improve with the conclusion of the proposed IPO, which would result in a 50% increase in the equity base.

HDFC’s liquidity was somewhat constrained in 2004 due to high loan growth but has eased off to an extent during H1-05. Nevertheless going forward liquidity would remain a constraint to be addressed given the strong loan growth and the bank’s reliance on wholesale borrowings.

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