RAM reaffirms Lankaputhra Development Bank’s ratings
View(s):RAM Ratings Lanka has reaffirmed the respective long and short-term financial institution ratings of Lankaputhra Development Bank (LDB) at A- and P1. The long-term rating carries a stable outlook.
RAM said the ratings are supported by the bank’s strong capitalisation, funding and liquidity positions and the financial flexibility derived from its sole shareholder, the Government of Sri Lanka. On the other hand, the ratings are weighed down by the bank’s weak loan quality and average performance.
The bank is a relatively small sized player in the specialized banking industry, accounting for approximately just 0.94 per cent of industry assets as at end-FY December 2012.
The RAM media release said the bank’s asset base continues to be dominated by investments in government securities and deposits in state-owned financial institutions. These low-risk investments balance its highly risky loan assets. Although its credit assets have expanded at a relatively moderate pace of 12.53 per cent y-o-y in FY December 2012; primarily driven by micro finance loans and pawning, the loan base remained relatively stagnant, reflecting the management’s “disinclination to lending”.
Overall, the company’s gross non-performing loan (NPL) ratio weakened to 44.63 per cent as at end-9M FY December 2013 and continued to remain high against similar rated peers.
“LDB also faces risks associated with the repossession and disposal of collateral owing to its inability to exercise parate rights and the relatively industry-specific nature of collateral. This coupled with its highly concentrated loan portfolio remains a concern. As such, the bank’s loan quality is viewed to be weak,” the release said.
The bank’s core performance improved in FY December 2012, supported by increased yields on its investments in government securities and fixed deposits amid rising interest rates. On the other hand, its interest expenses remained low due to its funding composition, which was dominated by shareholders’ funds and low-cost borrowings.
Overall, LDB’s performance is deemed average; its net interest margin (NIM), cost-to-income ratio and return on assets (ROA) were in line with similar rated peers.
“However, in view of the receding interest rate environment coupled with its conservative loan expansion strategy, the bank’s performance indicators are expected to be subdued going forward,” the release said.