SMIB is a licensed specialised bank created by the government following the amalgamation of two state-owned banks.
SMIB, which comes under the purview of the Ministry of Finance and Planning, is only permitted to disburse loans for housing, agriculture or for industry.
It is a medium-sized bank that accounted for 3.34% of the industry’s assets as at end-December 2008, and has limited geographic reach; of its 13 branches, 6 are in the western province.
SMIB has been aggressively expanding its loan portfolio in the past 2 years, despite the weakening macroeconomic environment, RAM Ratings said.
The bank’s loan portfolio consists of housing loans collateralised either by property or by the Employees’ Provident Fund (EPF).
EPF-backed loans took up 42.77% of SMIB’s total loans as at the end of FYE 31 December 2008 (“FY Dec 2008”); loans backed by property accounted for another 55.24%."Although SMIB’s gross non-performing-loan (NPL) ratio (classified on a 3-months-past-due basis) stood at 27.58% as at end-FY Dec 2008, we note that NPLs from its EPF-backed loan portfolio accounted for 80.31% of the Bank’s total NPLs."
Excluding these NPLs (since they are reimbursed by the Central Bank), SMIB’s NPL ratio would stand at a much lower 11.45% (end-June 2009: 14.54%) – albeit weaker than the industry average of 7.6%.
RAM Ratings Lanka said it notes that the high level of NPLs reflects the bank’s social objective of providing housing for the masses.
Since the arrears (capital and interest) on loans collateralised by the EPF are only settled by the Central Bank once every year, the bank's cash inflow is volatile, RAM Ratings said.
"Nonetheless, SMIB’s funding and liquidity position is deemed adequate, underpinned by its deposit franchise (derived from state ownership)."
Amid waning public confidence in private financial institutions, SMIB’s deposit base augmented by 2.01 billion rupees as at end-June 2009, reflecting its deposit franchise, the rating agency said.
Concurrently, customer deposits accounted for 92.69 percent of total interest bearing funding as at the same date.
"However, the bank has an inherent negative gap in its ALMM, as it provides long term housing financing funded by short tenure deposits."
The majority of its deposits were within the one-year bucket while bulk of loans were in the greater than the five-year bucket, exposing the bank to both interest rate and liquidity risks, RAM said.
Being a state linked entity, SMIB had been a beneficiary of concessionary funding through the finance ministry. The bank received funding from the Asian Development Bank and the United States Agency for International Development.
"The interest rate mismatch in the bank’s ALMM pressured its financial performance," RAM said.
"Short term deposits re-priced upwards in the rising interest rate environment, while rates on long term loans inched-up at a slower pace."
Accordingly, SMIB’s net interest margin (NIM) narrowed from 7.96% as at end-FY Dec 2006 to 3.47% as at end-FY Dec 2008.
However, this was still better than the industry averages of 4.2% and 2.8%.
Concurrently, SMIB’s return on assets (ROA) and return on equity (ROE) also weakened to 0.40% (end-FY Dec 2006: 3.28%) and 2.18% (end-FY Dec 2006: 13.02%).
Despite the bank’s moderate financial performance, which had suppressed its internal rate of capital generation, SMIB’s capital adequacy is deemed healthy as its risk-weighted capital-adequacy ratios (RWCARs) are well above the regulatory minimums.
The bank’s tier-1 and overall RWCARs clocked in at 27.81% and 28.47%, as at end-FY Dec 2008 - well above the corresponding regulatory floors of 5% and 10%.
At the same time, the banks regular payments to the state has also hampered its capital growth.
Over the past five years, the bank has contributed 326.00 million rupees of its total post-tax profits of 980.62 million rupees.