ISSN: 1391 - 0531
Sunday January 6, 2008
Vol. 42 - No 32
Financial Times  

Negative outlook for SMIB from Fitch

Fitch Ratings Lanka said this week it has downgraded the National Long-term rating of State Mortgage and Investment Bank (SMIB) to 'A-(lka)' (A minus (lka)) from 'A(lka)', and revised the rating Outlook to Negative from Stable.

The rating downgrade reflects SMIB's deteriorating profitability brought on by its inherent interest rate risk, and the escalation of such risk in the current interest rate environment. The rating also factors in SMIB's state ownership, comfortable capital position, as well as the manageable and relatively low ultimate credit risk inherent in residential housing finance. The revision of the Outlook to Negative reflects Fitch's views on the continuing challenges that will be faced by the bank in arresting its deteriorating profitability over the ensuing 12-18 months, in the prevailing weak macroeconomic environment, the rating agency said.

SMIB is exposed to a significant level of interest rate risk due to the inherent maturity mismatch between its funding avenues and interest earning assets. While the bank's earning assets consist mainly of housing loans to fixed income earners from the low and middle income segments with tenures of 15 years at fixed interest rates, over 60% of its funding at end-Q307 were exposed to re-pricing cycles of one year or less. The rising interest rate environment in 2007 (where 1 year Treasury Bills rose by over 700 basis points) exacerbated SMIB's pricing mismatch, the statement said.

SMIB reported a reduction in its gross non-performing mortgage loan ratio (NPL) to 18.0% at end-Q307 from 19.8% at FYE06, due to concentrated recovery efforts and the growth of its mortgage loan book. Although the bank's mortgage loan NPLs are relatively higher than its peers (which is largely a characteristic of the market segment catered to by SMIB), Fitch notes that the ultimate credit risk to the bank is still low, as indicated by the fact that only 1.6% of gross NPLs had permeated into the "above 18 months in arrears" category at end-Q307, compared to 1.4% at FYE06.

 

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