Fitch rates Seylan Bank’s debt; says bank needs fresh capital, tight risk management

November 2, 2006 (LBO) – Fitch Ratings Lanka has given a ‘BBB+(lka)’ rating for Seyl Bank’s upcoming five year unsecured subordinated redeemable debentures, the rating agency said Thursday. Seylan’s long-term debt is rated A-(lka) by Fitch with a stable rating outlook.

The ratings reflect Seylan’s market position as the fifth-largest licensed commercial bank in Sri Lanka, as well as its consequent systemic importance and established customer franchise.

However, the rating also factors in the bank’s weak asset quality, relatively weak capital position and resulting poor solvency, says Fitch.

Seylan’s non-performing loan (NPL, including foreclosed assets) ratio continued to be comparatively higher than that of its peers at 13.1 percent at FYE05 despite a decline in this ratio from 15.9 percent at FYE04.

Fitch notes that fresh NPL accretion remains high at 5.5 percent of average loans in FY05.

Fitch says Seylan needs to brush up its risk management skills and fine tune credit appraisal system to improve and avoid further deterioration of its asset quality, particularly in light of high loan growth of 27.0 percent during FY05 which was above that of its peers.

Seylan’s loan loss provision coverage was 37.3 percent at FYE05.

The agency considers this level of coverage to be inadequate in light of Seylan’s capital position which is reflected by its weak solvency as indicated by its high net NPL/equity ratio of 102.6 percent at FYE05.

Reported total capital adequacy ratio (CAR) at the bank level was 8.11 percent at FYE05, below the regulatory minimum of 10.0 percent, while at the group level this ratio was at 10.27 percent at FYE05.

Seylan achieved a total CAR of 10.03 percent at the bank level at during 3Q06, fulfilling the regulatory requirement helped by recent capital infusions through the issuance of non-voting shares (which almost doubled the bank’s issued share capital), and the subordinated debt of 1.2 billion rupees raised in July 2006.

However, in Fitch’s opinion, the bank will need further infusions over the medium term to support current levels of loan growth.

The agency believes that Seylan’s current level of profitability as indicated by return on assets of 0.7 percent in FY05 and its dividend policy will not allow for sufficient internal capital formation to support the pace of loan growth the bank has maintained in the recent past.

Hence, Fitch views capital infusion and faster NPL resolution as crucial for Seylan to sustain its financial profile.

The bank could see a downgrade to its ratings if there is an inability on the part of the bank to remain adequately capitalised and improve solvency.

Established in 1988, Seylan has expanded aggressively to achieve its present position within the banking industry, accounting for 6.5 percent of banking system assets at FYE05.

The Ceylinco group is Seylan’s main shareholder and owns 19.0 percent of the bank’s voting equity while several employee share ownership trusts collectively own 27.0 percent of Seylan’s voting equity.