Seylan Bank’s Rs. 1 bn debenture gets BBB+ (sri) rating

Seylan Bank has picked up a BBB+ (sri) rating for its upcoming five year billion rupee debenture from Fitch Ratings Lanka. Seylan Bank has picked up a BBB+ (sri) rating for its upcoming five year billion rupee debenture from Fitch Ratings Lanka. The bank is issuing unsecured subordinated debt to meet beef up its capital.

Fitch Ratings also re-affirmed Seylan’s entity rating of A- (sri) as well as BBB+ (sri) assigned to 2001/06, 2002/07, 2003/08 and 2004/09 subordinated debentures, the rating agency said in a statement on Monday.

While the BBB+ (sri) rating indicates a low expectation of credit risk, it could alter if there are adverse shifts in external conditions.

“Seylan’s ratings reflect its relative market position and franchise within the domestic banking system, the gradual improvement in risk management processes and enhanced focus on recovery of NPL’s (non-performing loans),” Fitch said explaining its decision.

Fitch gave good marks for Seylan’s decision to step up its provisioning and recoveries during the past year. “New corporate loans extended in 2004 have generally been to stronger entities.”

“However, the ratings also reflect Seylan’s weak capital position and weak asset quality,” Fitch warned.

While Seylan’s reported total CAR (capital adequacy ratio) was 12.15 percent as at Dec 2004 (above the regulatory minimum of 10.00 percent), Fitch views capital infusion and faster NPL workout as important for Seylan to support growth in loans and maintain its financial profile.

“This would be necessary, given that internal generation of capital appears constrained by high cost structures and increased taxation.”

Seylan’s present consolidated capital is also of a somewhat lower quality given that revaluation surpluses and loans to employee share trusts account for 25 percent and five percent respectively of its consolidated equity.

Although Seylan has improved provision cover to 38 percent, and also achieved encouraging results in recoveries, remaining NPLs are still substantial.

The bank’s gross NPL ratio was 17 percent (including foreclosed assets and certain weak credits), while it’s net NPL/Equity was 106 percent as at Dec 2004.

“Hence the risk of equity erosion due to potential losses on NPLs in the event the carrying value of collateral is not recoverable is still high,” Fitch warned.

Set up in 1987, Seylan is currently the third largest private bank commanding six percent market share of banking system assets.

Seylan’s consolidated profits declined by 66 percent in 2004 mainly due to increased provisioning, lower capital gains and higher taxes.

The bank enjoys a strong franchise with mid-sized corporates and the SME (small and medium) segment; loans to this segment accounted for an estimated 56 percent of its total loans in 2004.

Lately, Seylan increased its focus on the corporate segment which now accounts for an estimated 21 percent of its loans.

Fitch Ratings Lanka Ltd is a joint venture between Fitch Ratings, USA, International Finance Corporation Washington, Sri Lanka’s Central Bank and several other leading local financial institutions.

Fitch Ratings, USA is one of the three global full service credit rating agencies and rates over 85 sovereign nations, 7,600 structured finance ratings, 2,900 international banks and financial institutions.

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