Small Stature

Dec 20, 2011 (LBO) – RAM Ratings Lanka has confirmed the long- and short-term financial institution ratings of Sri Lanka’s Union Bank at BBB and P3 with the long-term rating having a stable outlook. Union Bank’s performance is deemed moderate, albeit with an improving trend since fiscal 2009. Supported by its robust loan growth that had diluted the effects of the low-yielding deep discounted bond (DDB), the Group’s interest income surged in 9M FY Dec 2011, thus pushing its net interest margin (NIM) up to 4.79% year-on-year (y-o-y). Nevertheless, its NIM remains weaker than those of its banking peers due to the DDB. Meanwhile, Union Bank’s cost-to-income ratio also eased in fiscal 2010 and 9M FY Dec 2011, backed by its rising top line, but still weaker than its peers’ owing to its small stature.

That said, the Group achieved a record pre-tax profit of LKR 307.99 million in FY Dec 2010, followed by LKR 324.04 million in 9M FY Dec 2011 (+40.28% y-o-y). Union Bank’s funding profile is perceived to be moderate due to the Group’s weak franchise and lack of geographical reach in comparison to larger LCBs. Due to the Group’s aggressive loan growth and enlarged shareholders’