The affirmation of Seylan Bank’s ‘BBB+(lka)’ rating by Fitch Ratings reflects its systemic importance, given its size and implied state support with the state indirectly owning 28% of the bank at present.
In a ‘Full Rating’ report, Fitch stated that Seylan’s stand alone credit profile is weak, due to weak asset quality – a reflection of historically weak risk management systems and controls and a slow economic environment that prevailed during the three years to end 2009. The bank’s systems and processes are currently being restructured, driven by renewed focus under the direction of a new board and a change in ownership.
Seylan Bank recorded negative loan growth in the financial year ending 31 December 2009, similar to the current banking sector trend as more focus has been on recoveries amid weak credit demand since 2009. Fitch Ratings notes that the recovery in credit growth for the overall banking sector will remain relatively weak through 2010.
Seylan’s gross non-performing loans (NPL) ratio at a group level stood at 29.38% at FYE09, compared to a median of 6.85% for the three large domestic private commercial banks. However the pace of incremental NPL growth has reduced in Q209, while NPL’s reduced in absolute terms by 2.8% in Q309 and 4.5% in Q409, due to the bank’s focused recovery efforts. Fitch noted that over 16% of NPL’s at FYE09 consisted of direct lending to five Ceylinco group companies. A further 25% of NPL’s were made up of 20 large exposures. The bank expects to recover a majority of this in the short term.
The report stated that Seylan’s return on assets (ROA) improved to 0.30% at FYE09 from -0.06% at FYE08, at a group level. The improvement in ROA was driven by aggressive operating cost curtailment, recoveries of NPL’s and an improving net interest margin (NIM). The operating expenses/average assets ratio reduced to 4.26% at FYE09 from 5.24% at FYE08, helped by the attrition of 146 employees at the bank level. This was in part due to a decision by the management to reduce the compulsory retirement age of bank staff, and also in part due to natural staff turnover during the period of stress, post liquidity crisis at end 2008.
The bank’s total staff amounted to 2,550 at end December 2009. Furthermore, Fitch stated that the bank expects to improve its management information systems in the medium term, which could help reduce excess staff and improve its currently high cost structure, although there is likely to be a relatively high one off cost to the income statement over the next year or two.
Fitch also noted that the level of independent board oversight of Seylan’s operations has improved considerably since December 2008. All 10 present board members were appointed post crisis. Five members, including the two executives (which includes the chairman), were appointed by the Monetary Board of the Central Bank of Sri Lanka, in order to facilitate the restructuring of the bank. The remaining three of the above five serve in a non executive capacity and are independent and oversee the new credit and audit committees among others. In contrast, Seylan’s board contained one independent director pre crisis.
Consequent to the new share issue, five more members serve in a non executive capacity, and represent the new shareholders: two from Sri Lanka Insurance Corporation, one from Bank of Ceylon and one each from Lanka Orix Leasing Company PLC (‘A(lka)’/Stable) and Browns Plantations Investment Private Limited. The aggregate voting rights of the share ownership trusts (which control 9.67% of voting equity) lies with the chairman of the board of directors. |
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