Business Times

RAM downgrades Lankaputhra

Sri Lankan state-backed small business lender Lankaputhra Development Bank (LDB) recently had its long term financial institution rating downgraded to "A-", from "A", by ratings agency RAM.

This was due to the bank's "fragile credit quality vis-à-vis its peers, despite the marginal improvement in its gross non-performing-loans ('NPL') ratio", according to RAM. Additionally, RAM also noted that "the downgrade also reflects LDB’s lack of clear strategic direction which may reduce its systemic importance, and has led to the continued shrinking of its lending portfolio and a persistent decline in its performance".

However, at the same time, RAM also indicated that the bank's outlook had been upwardly revised to stable, from negative, while its’ short term financial institution rating had been upheld at "P1".

Meanwhile, RAM also opined that "LDB’s funding and liquidity positions remain very strong, as reflected by its state funding and liquid-asset ratio of 22.21 times as at end-December 2011 respectively. The bank’s funding requirements remain fulfilled by its shareholders’ funds and a long-term concessionary loan from Kreditanstalt für Wiederaufbau ('KfW'), a development bank backed by the German government. Together, these accounted for 91.82% of LDB’s funding base as at end-December 2011, with customer deposits and other borrowings comprising the remainder". Also stating; "While the bank’s gross NPL ratio improved slightly to 41.25% as at end-December 2011 from 44.34% as at end-December 2010, it remained significantly poorer than its banking peers; the poor credit quality is due to its weak underwriting quality and poor collections arising from its small branch network and lack of parate rights".

On the other hand, RAM also suggested that LDB's "Rs. 3.90 billion of shareholders’ funds could easily absorb its Rs. 418.65 million of net NPLs as at the same date, with its [Risk Weighted Capital Adequacy Ratio] still kept robust at around 65%". This latter ratio was at 69.85% as of end-December 2011.

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