Sri Lanka’s State Mortgage & Investment Bank (SMIB) was downgraded by Fitch Ratings Lanka to A (sri) on deteriorating asset quality, and its inability to maintain market share, Fitch said Thursday. Sri Lanka’s State Mortgage & Investment Bank (SMIB) was downgraded by Fitch Ratings Lanka to A (sri) on deteriorating asset quality, and its inability to maintain market share, Fitch said Thursday. The island’s pioneering housing bank’s long-term unsecured senior debt was earlier rated A+ (sri) by Fitch.
While an ‘A (sri)’ rating is in the investment grade, indicating a low expectation of credit risk, SMIB is still exposed to economic and market changes.
The downgrade, says Fitch, reflects SMIB’s weak and deteriorating competitive position among peers, which has resulted in a steady decline in its core business of housing mortgages since 2001, as well as poor asset quality and relatively high exposure to interest rate risk.
“In addition, SMIB’s liquidity is somewhat low aggravated by deposit concentrations amongst a few institutional depositors. However, SMIB’s rating takes comfort from its state ownership, strong capital base and high profitability,” the statement said.
The bank’s weak monitoring and follow up procedures have also led to the overall deterioration in asset quality.
SMIB has had a
The gross non-performing loan (NPL) ratio within its mortgage portfolio was high at 21.7 percent as at Nov.’05.
The bank currently leans heavily on business from the Employees Provident Fund (EPF) to grow its loan book.
‘EPF loans’ are secured by borrowers’ provident funds held by the state pension fund.
SMIB’s net NPL/Equity
The ‘EPF loans’ (33 percent of total portfolio as at Dec. ’04) have low credit risk due to ease of recovery and can only be offered by state banks.
“Over-reliance on EPF loans will not address the bank’s core problem of weak competitiveness and also exposes SMIB to vulnerabilities such as those which would arise if these schemes are discontinued or significantly changed,” warns Fitch.
Since mid-2005, SMIB’s management has made some headway by launching new products to broaden deposits base and increase mortgage loan portfolio.
“However, results have been modest and it is unclear if these measures alone would remedy the short comings.”
SMIB’s profitability remained high with healthy net interest margins (8.7 percent in 2004) and high ROA’s (3.7 percent in 2004), thanks to the bank’s relatively large equity base (26.6 percent of assets as at Dec. ’04).
Fitch says SMIB’s rating outlook is stable, as management changes to correct short comings are still in its early days of implementation.
“A downward revision of SMIB’s ratings would arise if these afore-mentioned strategic issues are not addressed coupled with a further deterioration in its asset quality and solvency position.”
Looking ahead, SMIB’s core business of mortgage lending, will continued to be threatening by other banks, who mobilise low costs funds using better technology and wider branch network.
-Mel Gunasekera: email@example.com